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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

                           ---------------------------



              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001     COMMISSION FILE NUMBER 333-18723

                           MAXXAM GROUP HOLDINGS INC.
             (Exact name of Registrant as Specified in its Charter)


                   DELAWARE                                76-0518669
         (State or other jurisdiction                   (I.R.S. Employer
      of incorporation or organization)              Identification Number)

         5847 SAN FELIPE, SUITE 2600                          77057
                HOUSTON, TEXAS                             (Zip Code)
   (Address of Principal Executive Offices)

       Registrant's telephone number, including area code: (713) 975-7600

                           ---------------------------


           Securities registered pursuant to Section 12(b) of the Act:

                                      None.

           Securities registered pursuant to Section 12(g) of the Act:

                                      None.

                           ---------------------------


      Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X|   No |_|

 All of the Registrant's voting stock is held by an affiliate of the Registrant.

      Number of shares of Common Stock outstanding at April 12, 2002: 1,000

      REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION (I)(1)(A)
AND (B) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.

                      DOCUMENTS INCORPORATED BY REFERENCE:

                                 Not applicable.


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                                TABLE OF CONTENTS


                                     PART I

   Item 1.     Business
                    General
                    Forest Products Operations
                    Aluminum Operations

   Item 2.     Properties

   Item 3.     Legal Proceedings

   Item 4.     Submission of Matters to a Vote of Security Holders

                                     PART II

   Item 5.     Market for Registrant's Common Equity and Related Stockholder Matters

   Item 6.     Selected Financial Data

   Item 7.     Management's Discussion and Analysis of Financial Condition and Results
                    of Operations

   Item 7A.    Quantitative and Qualitative Disclosures About Market Risk

   Item 8.     Financial Statements and Supplementary Data
                    Report of Independent Public Accountants
                    Consolidated Balance Sheet
                    Consolidated Statement of Operations
                    Consolidated Statement of Stockholder's Deficit
                    Consolidated Statement of Cash Flows
                    Notes to Consolidated Financial Statements

   Item 9.     Changes in and Disagreements with Accountants on Accounting and
                    Financial Disclosure

                                    PART III

   Items
      10-13.   Not applicable.

                                     PART IV

   Item 14.    Exhibits, Financial Statement Schedules, and Reports on Form 8-K



ITEM 1. BUSINESS

GENERAL

      MAXXAM Group Holdings Inc. (the "COMPANY" or "MGHI") is a wholly owned
subsidiary of MAXXAM Inc. ("MAXXAM"). The Company's wholly owned subsidiary,
MAXXAM Group Inc. ("MGI"), and MGI's wholly owned subsidiaries, The Pacific
Lumber Company ("PACIFIC LUMBER") and Britt Lumber Co., Inc. ("BRITT"), are
engaged in forest products operations. Pacific Lumber's principal wholly owned
subsidiaries are Scotia Pacific Company LLC ("SCOTIA LLC") and Salmon Creek LLC
("SALMON CREEK"). Salmon Creek's wholly owned subsidiary is Lakepointe Assets
Holdings LLC ("LAKEPOINTE ASSETS"). Lakepointe Assets is engaged in commercial
real estate ownership and leasing. As used herein, the terms "Company," "MGHI,"
"MGI," "Pacific Lumber," "Kaiser" (as defined below) or "MAXXAM" refer to the
respective companies and their subsidiaries, unless otherwise noted or the
context indicates otherwise.

      Pacific Lumber, which has been in continuous operation for over 130 years,
engages in several principal aspects of the lumber industry--the growing and
harvesting of redwood and Douglas-fir timber, the milling of logs into lumber
products and the manufacturing of lumber into a variety of value-added finished
products. Britt manufactures redwood fencing and decking products from small
diameter logs, a substantial portion of which Britt acquires from Pacific Lumber
(as Pacific Lumber cannot efficiently process them in its own mills). The
Company also owns 27,938,250 shares of the common stock of Kaiser Aluminum
Corporation ("KAISER"), representing a 34.6% interest in Kaiser. In addition,
MAXXAM has a direct interest in Kaiser of 27.3%. Kaiser is a publicly traded
company (OTC Bulletin Board trading symbol "KLUCQ") which operates in several
principal aspects of the aluminum industry--the mining of bauxite, the refining
of bauxite into alumina, the production of primary aluminum from alumina, and
the manufacture of fabricated (including semi-fabricated) aluminum products. On
February 12, 2002, Kaiser, its wholly owned operating subsidiary, Kaiser
Aluminum and Chemical Corporation ("KACC") and 13 of KACC's wholly owned
subsidiaries, filed separate voluntary petitions under Chapter 11 of the United
States Bankruptcy Code (the "CODE") in the United States Bankruptcy Court for
the District of Delaware (the "COURT"). On March 15, 2002, two additional wholly
owned subsidiaries of KACC filed petitions in the Court. Kaiser, KACC and the 15
subsidiaries of KACC that have filed petitions are collectively referred to
herein as the "DEBTORS" and the Chapter 11 proceedings of these entities are
collectively referred to herein as the "CASES." For purposes hereof, the term
"FILING DATE" shall mean, with respect to any particular Debtor, the date on
which such Debtor filed its Case. See "--Aluminum Operations--Reorganization
Proceedings" and Notes 1, 2 and 7 to the Consolidated Financial Statements.

      This Annual Report on Form 10-K contains statements which constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements appear in a number of places
(see Item 1. "Business--Forest Products Operations--Pacific Lumber
Operations--Harvesting Practices," "--Production Facilities," "--Regulatory and
Environmental Factors" and "--Aluminum Operations--General" "--Reorganization
Proceedings," "--Business Operations," "--Competition;" Item 3. "Legal
Proceedings" and Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Background," "--Financial Condition and
Investing and Financing Activities" and "--Critical Accounting Policies"). Such
statements can be identified by the use of forward-looking terminology such as
"believes," "expects," "may," "estimates," "will," "should," "plans" or
"anticipates" or the negative thereof or other variations thereon or comparable
terminology, or by discussions of strategy. Readers are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
significant risks and uncertainties, and that actual results may vary materially
from the forward-looking statements as a result of various factors. These
factors include the effectiveness of management's strategies and decisions,
general economic and business conditions, developments in technology, new or
modified statutory or regulatory requirements and changing prices and market
conditions. This Report identifies other factors that could cause such
differences between such forward-looking statements and actual results. No
assurance can be given that these are all of the factors that could cause actual
results to vary materially from the forward-looking statements.

FOREST PRODUCTS OPERATIONS

   OPERATIONS

      Timber and Timberlands
      Pacific Lumber owns and manages approximately 218,000 acres of virtually
contiguous commercial timberlands located in Humboldt County along the northern
California coast, an area which has very favorable soil and climate conditions
for growing timber. These timberlands contain approximately 71% redwood, 23%
Douglas-fir and 6% other timber, are located in close proximity to Pacific
Lumber's and Britt's sawmills and contain an extensive network of roads.
Approximately 205,000 acres of Pacific Lumber's timberlands are owned by Scotia
LLC (the "SCOTIA LLC TIMBERLANDS"), and Scotia LLC has the exclusive right to
harvest (the "SCOTIA LLC TIMBER RIGHTS") approximately 12,200 acres of Pacific
Lumber's timberlands. The timber in respect of the Scotia LLC Timberlands and
the Scotia LLC Timber Rights is collectively referred to as the "SCOTIA LLC
TIMBER." Substantially all of Scotia LLC's assets are pledged as security for
its $867.2 million original aggregate principal amount of 6.55% Series B Class
A-1 Timber Collateralized Notes, 7.11% Series B Class A-2 Timber Collateralized
Notes and 7.71% Series B Class A-3 Timber Collateralized Notes (collectively the
"TIMBER NOTES"). The Timber Notes are governed by an Indenture (the "TIMBER
NOTES INDENTURE"). Pacific Lumber harvests and purchases from Scotia LLC
virtually all of the logs harvested from the Scotia LLC Timber. See
"--Relationships with Scotia LLC and Britt" below for a description of this and
other relationships among Pacific Lumber, Scotia LLC and Britt.

      On March 1, 1999, Pacific Lumber, Scotia LLC and Salmon Creek
(collectively, the "PALCO COMPANIES") consummated the Headwaters Agreement (the
"HEADWATERS AGREEMENT") with the United States and California. Pursuant to the
agreement, approximately 5,600 acres of timberlands owned by the Palco Companies
known as the Headwaters Forest and the Elk Head Springs Forest (the "HEADWATERS
TIMBERLANDS") were transferred to the United States. In exchange, Salmon Creek
was paid $299.9 million, Scotia LLC was paid $150,000 and approximately 7,700
acres of timberlands known as the Elk River Timberlands (the "ELK RIVER
TIMBERLANDS") were transferred to Pacific Lumber and subsequently transferred to
Scotia LLC. In addition, habitat conservation and sustained yield plans (the
"ENVIRONMENTAL PLANS") were approved covering the Scotia LLC Timberlands and
California agreed to purchase a portion of Pacific Lumber's Grizzly Creek grove,
as well as Scotia LLC's Owl Creek grove. In December 2000, California purchased
the Owl Creek grove for $67.0 million in cash, and on November 15, 2001,
purchased a portion of the Grizzly Creek grove for $19.8 million in cash. Salmon
Creek placed $169.0 million of the proceeds from the sale of the Headwaters
Timberlands into a Scheduled Amortization Reserve Account ("SAR ACCOUNT") in
order to support principal payments on Scotia LLC's Timber Notes. See
"--Regulatory and Environmental Factors" and Note 4 to the Consolidated
Financial Statements.

      Timber generally is categorized by species and the age of a tree when it
is harvested. "OLD GROWTH" trees are often defined as trees which have been
growing for approximately 200 years or longer, and "YOUNG GROWTH" trees are
those which have been growing for less than 200 years. The forest products
industry grades lumber into various classifications according to quality. The
two broad categories into which all grades fall based on the absence or presence
of knots are called "upper" and "common" grades, respectively. Old growth trees
have a higher percentage of upper grade lumber than young growth trees.

      Pacific Lumber engages in extensive efforts to supplement the natural
regeneration of timber and increase the amount of timber on its timberlands.
Pacific Lumber is required to comply with California forestry regulations
regarding reforestation, which generally require that an area be reforested to
specified standards within an established period of time. Pursuant to the
Services Agreement described below (see "--Relationships with Scotia LLC and
Britt"), Pacific Lumber conducts regeneration activities on the Scotia LLC
Timberlands for Scotia LLC. Regeneration of redwood timber generally is
accomplished through the natural growth of new redwood sprouts from the stump
remaining after a redwood tree is harvested. Such new redwood sprouts grow
quickly, thriving on existing mature root systems. In addition, Pacific Lumber
supplements natural redwood regeneration by planting redwood seedlings.
Douglas-fir timber is regenerated almost entirely by planting seedlings. During
2001, Pacific Lumber planted an estimated 1,006,000 redwood and Douglas-fir
seedlings.

      California law requires timber owners such as Pacific Lumber to
demonstrate that their operations will not decrease the sustainable productivity
of their timberlands. A timber company may comply with this requirement by
submitting a sustained yield plan to the California Department of Forestry and
Fire Protection ("CDF") for review and approval. A sustained yield plan contains
a timber growth and yield assessment, which evaluates and calculates the amount
of timber and long-term production outlook for a company's timberlands, a fish
and wildlife assessment, which addresses the condition and management of
fisheries and wildlife in the area, and a watershed assessment, which addresses
the protection of aquatic resources. The relevant regulations require
determination of a long-term sustained yield ("LTSY") harvest level, which is
the average annual harvest level that the management area is capable of
sustaining in the last decade of a 100-year planning horizon. The LTSY is
determined based upon timber inventory, projected growth and harvesting
methodologies, as well as soil, water, air, wildlife and other relevant
considerations. A sustained yield plan must demonstrate that the average annual
harvest over any rolling ten-year period within the planning horizon does not
exceed the LTSY.

   Pacific Lumber is also subject to federal and state laws providing for the
protection and conservation of wildlife species which have been designated as
endangered or threatened, certain of which are found on Pacific Lumber's
timberlands. These laws generally prohibit certain adverse impacts on such
species (referred to as a "TAKE"), except for incidental takes which do not
jeopardize the continued existence of the affected species and which are made in
accordance with an approved habitat conservation plan and related incidental
take permit. A habitat conservation plan analyzes the impact of the incidental
take and specifies measures to monitor, minimize and mitigate such impact. As
part of the Headwaters Agreement, Scotia LLC and Pacific Lumber reached
agreement with various federal and state regulatory agencies with respect to a
sustained yield plan (the "SYP") and a multi-species habitat conservation plan
(the "HCP"). See "--Regulatory and Environmental Factors" below.

      During 2001, comprehensive external and internal reviews were conducted by
Pacific Lumber with respect to its business operations. These reviews were an
effort to identify ways in which Pacific Lumber could operate on a more
efficient and cost effective basis. Based upon the results of these reviews,
Pacific Lumber, among other things, indefinitely idled two of its four sawmills,
eliminated certain of its operations, including its soil amendment and concrete
block activities, has began utilizing more efficient harvesting methods and
adopted certain other cost saving measures. Most of these changes were
implemented by Pacific Lumber in the last quarter of 2001, or the first quarter
of 2002. Pacific Lumber also ended its internal logging operations as of April
1, 2002, and intends to rely exclusively on third party contract loggers to
conduct these activities in the future. See "--Production Facilities "and
"--Regulatory and Environmental Factors - Timber Operations."

      Harvesting Practices
      This section contains statements which constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. See Item 1. "Business--General" in this section for cautionary
information with respect to such forward-looking statements.

      The ability of Pacific Lumber to harvest timber will depend, in part, upon
its ability to obtain regulatory approval of timber harvesting plans ("THPS").
Prior to harvesting timber in California, companies are required to obtain the
CDF's approval of a detailed THP for the area to be harvested. A THP must be
submitted by a registered professional forester and must include information
regarding the method of proposed timber operations for a specified area, whether
the operations will have any adverse impact on the environment and, if so, the
mitigation measures to be used to reduce any such impact. The CDF's evaluation
of THPs incorporates review and analysis of such THPs by several California and
federal agencies and public comments received with respect to such THPs. An
approved THP is applicable to specific acreage and specifies the harvesting
method and other conditions relating to the harvesting of the timber covered by
such THP. The number of Scotia LLC's approved THPs and the amount of timber
covered by such THPs varies significantly from time to time, depending upon the
timing of agency review and other factors. Timber covered by an approved THP is
typically harvested within a one year period from the date harvesting first
begins. The Timber Notes Indenture requires Scotia LLC to use its best efforts
(consistent with prudent business practices) to maintain a number of pending
THPs which, together with THPs previously approved, would cover rights to
harvest a quantity of Scotia LLC Timber adequate to pay interest and principal
amortization based on the Minimum Principal Amortization Schedule for the Timber
Notes for the next succeeding twelve month period. See Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Background" for information regarding developments in the rate of
THP approvals.

      Pacific Lumber maintains a detailed geographical information system
covering its timberlands (the "GIS"). The GIS covers numerous aspects of Pacific
Lumber's properties, including timber type, tree class, wildlife data, roads,
rivers and streams. Pursuant to the terms of the Services Agreement (as defined
below), Pacific Lumber, to the extent necessary, provides Scotia LLC with
personnel and technical assistance to assist Scotia LLC in updating, upgrading
and improving the GIS and the other computer systems owned by Scotia LLC. By
carefully monitoring and updating this data base and conducting field studies,
Pacific Lumber's foresters are better able to develop detailed THPs addressing
the various regulatory requirements. Pacific Lumber also utilizes a Global
Positioning System ("GPS") which allows precise location of geographic features
through satellite positioning. Use of the GPS greatly enhances the quality and
efficiency of the GIS data.

      Pacific Lumber employs a variety of well-accepted methods of selecting
trees for harvest designed to achieve optimal regeneration. These methods,
referred to as "silvicultural systems" in the forestry profession, range from
very light thinnings aimed at enhancing the growth rate of retained trees to
clear cutting which results in the harvest of all trees in an area and
replacement with a new forest stand. In between are a number of varying levels
of partial harvests which can be employed.

      Production Facilities
      This section contains statements which constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. See Item 1. "Business--General" in this section for cautionary
information with respect to such forward-looking statements.

      Pacific Lumber owns four highly mechanized sawmills and related facilities
located in Scotia, Fortuna and Carlotta, California. The sawmills historically
have been supplied almost entirely from timber harvested from Pacific Lumber's
timberlands, but are supplemented from time to time by logs purchased from third
parties. Since 1986, Pacific Lumber has implemented numerous technological
advances that have increased the operating efficiency of its production
facilities and the recovery of finished products from its timber. Pacific Lumber
produced approximately 160, 205 and 155 million board feet of lumber in 2001,
2000 and 1999, respectively. The Fortuna sawmill produces primarily common grade
lumber and during 2001 produced approximately 98 million board feet of lumber.
The Carlotta sawmill produces both common and upper grade redwood lumber and
during 2001, produced approximately 37 million board feet of lumber. Although
partially curtailed during July through November of 2001, Carlotta restarted in
December 2001. As part of Pacific Lumber's strategic review of its operations,
Sawmills "A" and "B" were indefinitely idled in 2001. Sawmill "A" formerly
processed Douglas-fir logs and Sawmill "B" formerly processed primarily large
diameter redwood logs. During 2001, Sawmills "A" and "B" processed approximately
17 million and 6 million board feet of lumber, respectively. Sawmills "A" and
"B" are both located in Scotia. See Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Background--Results
of Operations."

      Britt owns a 46,000 square foot mill in Arcata, California. Britt's
primary business is the processing of small diameter redwood logs into fencing
products for sale to retail and wholesale customers. Britt purchases, primarily
from Pacific Lumber but also from other timberland owners, small diameter (6 to
15 inch) redwood logs of varying lengths. Britt processes these logs at its mill
into a variety of fencing products, including "dog-eared" 1" by 6" fence stock
in six foot lengths, 4" by 4" fence posts in 6 through 12 foot lengths, and
other lumber products in 6 through 12 foot lengths. Britt's purchases of logs
from third parties are generally consummated pursuant to short-term contracts of
12 months or less. Britt's manufacturing operations are conducted on 12 acres of
land, ten acres of which are leased on a long-term fixed price basis from an
unrelated third party. An 18 acre log sorting and storage yard is located
one-quarter of a mile away. Britt's (single shift) mill capacity, assuming 40
production hours per week, is estimated at 37.4 million board feet of fencing
products per year. Britt recently constructed a 25,000 square foot
remanufacturing facility for fencing products, which became operational in the
third quarter of 2001.

      Pacific Lumber operates a finishing and remanufacturing plant in Scotia
which processes rough lumber into a variety of finished products such as trim,
fascia, siding and paneling. These finished products include a variety of
customized trim and fascia patterns. Remanufacturing enhances the value of some
grades of lumber by assembling knot-free pieces of narrower and shorter lumber
into wider or longer pieces in Pacific Lumber's state-of-the-art end and edge
glue plants. The result is a standard sized upper grade product which can be
sold at a significant premium over common grade products. Pacific Lumber has
also installed a lumber remanufacturing facility at its mill in Fortuna which
processes low grade redwood common lumber into value-added, higher grade redwood
fence and related products.

      Pacific Lumber dries the majority of its upper grade lumber before it is
sold. Upper grades of redwood lumber are generally air-dried for three to twelve
months and then kiln-dried for seven to twenty-four days to produce a
dimensionally stable and high quality product which generally commands higher
prices than "green" lumber (which is lumber sold before it has been dried).
Upper grade Douglas-fir lumber is generally kiln-dried immediately after it is
cut. Pacific Lumber owns and can operate up to 34 kilns, having an annual
capacity of approximately 95 million board feet, to dry its upper grades of
lumber efficiently in order to produce a quality, premium product. Pacific
Lumber also maintains several large enclosed storage sheds which can hold
approximately 27 million board feet of lumber.

      Pacific Lumber owns and operates a modern 25-megawatt cogeneration power
plant which is fueled almost entirely by the wood residue from Pacific Lumber's
milling and finishing operations. This power plant generates substantially all
of the energy requirements of Scotia, California, the town adjacent to Pacific
Lumber's timberlands where several of its manufacturing facilities are located.
Pacific Lumber sells surplus power to Pacific Gas and Electric Company. In 2001,
the sale of surplus power accounted for approximately 6% of the Company's total
revenues.

      Products
      The following table sets forth the distribution of MGI's lumber production
(on a net board foot basis) and revenues by product line:


                                               YEAR ENDED DECEMBER 31, 2001                       YEAR ENDED DECEMBER 31, 2000
                                        ----------------------------------------    --------------------------------------------
                                        % OF TOTAL                                  % OF TOTAL
                                        LUMBER         % OF TOTAL                   LUMBER        % OF TOTAL
                                        PRODUCTION     LUMBER         % OF TOTAL    PRODUCTION    LUMBER        % OF TOTAL
              PRODUCT                   VOLUME         REVENUES       REVENUES      VOLUME        REVENUES      REVENUES
-----------------------------------     ----------     ----------     ----------    ----------    ----------    ----------
Upper grade redwood lumber.........            7 %            19%            15%            7%           16%          14 %
Common grade redwood lumber........            68%            62%            51%           59%           58%          51 %
                                        ----------     ----------     ----------    ----------    ----------    ----------
   Total redwood lumber............            75%            81%            66%           66%           74%          65 %
                                        ----------     ----------     ----------    ----------    ----------    ----------
Upper grade Douglas-fir lumber.....             4%             7%             6%            4%            9%           8 %
Common grade Douglas-fir lumber....            20%            11%             9%           28%           16%          14 %
                                        ----------     ----------     ----------    ----------    ----------    ----------
   Total Douglas-fir lumber........            24%            18%            15%           32%           25%          22 %
                                        ----------     ----------     ----------    ----------    ----------    ----------
Other grades of lumber.............             1%             1%             1%            2%            1%            1%
                                        ----------     ----------     ----------    ----------    ----------    ----------
      Total lumber.................           100%           100%            82%          100%          100%           88%
                                        ==========     ==========     ==========    ==========    ==========    ==========

Logs...............................                                           6%                                        2%
                                                                      ==========                                ==========

Hardwood chips.....................                                           2%                                        2%
Softwood chips.....................                                           2%                                        4%
                                                                      ----------                                ----------
   Total wood chips................                                           4%                                        6%
                                                                      ==========                                ==========

      In 2001, MGI sold 244 million board feet of lumber, which accounted for
82% of its total revenues. Lumber products vary greatly by the species and
quality of the timber from which they are produced. Lumber is sold not only by
grade (such as "upper" grade versus "common" grade), but also by board size and
the drying process associated with the lumber.

      Redwood lumber has historically been MGI's largest product category.
Redwood is commercially grown only along the northern coast of California and
possesses certain unique characteristics that permit it to be sold at a premium
to many other wood products. Such characteristics include its natural beauty,
superior ability to retain paint and other finishes, dimensional stability and
innate resistance to decay, insects and chemicals. Typical applications include
exterior siding, trim and fascia for both residential and commercial
construction, outdoor furniture, decks, planters, retaining walls and other
specialty applications. Redwood also has a variety of industrial applications
because of its chemical resistance and because it does not impart any taste or
odor to liquids or solids.

      Upper grade redwood lumber, which is derived primarily from large diameter
logs and is characterized by an absence of knots and other defects, is used
primarily in distinctive interior and exterior applications. The overall supply
of upper grade lumber has been diminishing due to increasing environmental and
regulatory restrictions and other factors. See Item 7. "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Background."
Common grade redwood lumber, historically MGI's largest volume product, has many
of the same aesthetic and structural qualities of redwood uppers, but has some
knots, sapwood and a coarser grain. Such lumber is commonly used for
construction purposes, including outdoor structures such as decks, hot tubs and
fencing.

      Douglas-fir lumber is used primarily for new construction and some
decorative purposes and is widely recognized for its strength, hard surface and
attractive appearance. Douglas-fir is grown commercially along the west coast of
North America and in Chile and New Zealand. Upper grade Douglas-fir lumber is
derived primarily from old growth Douglas-fir timber and is used principally in
finished carpentry applications. Common grade Douglas-fir lumber is used for a
variety of general construction purposes and is largely interchangeable with
common grades of other whitewood lumber.

       MGI does not have any significant contractual relationships with third
parties relating to the purchase of logs. During 2001, MGI purchased
approximately 25 million board feet of logs from third parties.

      Pacific Lumber uses a whole-log chipper to produce wood chips from
hardwood trees which would otherwise be left as waste. These chips are sold to
third parties primarily for the production of facsimile and other specialty
papers. Pacific Lumber also produces softwood chips from the wood residue from
its milling operations. These chips are sold to third parties for the production
of wood pulp and paper products.

      Backlog and Seasonality

      MGI's backlog of sales orders at each of December 31, 2001 and 2000 was
approximately $15.7 million, the substantial portion of which was delivered in
the first quarter of the next fiscal year. MGI has historically experienced
lower first quarter sales due largely to the general decline in
construction-related activity during the winter months. As a consequence, MGI's
results in any one quarter are not necessarily indicative of results to be
expected for the full year. See "--Regulatory and Environmental Factors" below
and Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Background."

      Marketing
      The housing, construction and remodeling markets are the primary markets
for MGI's lumber products. MGI's policy is to maintain a wide distribution of
its products both geographically and in terms of the number of customers. MGI
sells its lumber products throughout the country to a variety of accounts, the
large majority of which are wholesalers, followed by retailers, industrial
users, exporters and manufacturers. Upper grades of redwood and Douglas-fir
lumber are sold throughout the entire United States, as well as to export
markets. Common grades of redwood lumber are sold principally west of the
Mississippi River, with California accounting for approximately 75% of these
sales in 2001. Common grades of Douglas-fir lumber are sold primarily in
California. In 2001, MGI had three customers which accounted for approximately
15%, 3% and 3%, respectively, of MGI's total net lumber sales. Exports of lumber
accounted for approximately 4% of MGI's total revenues in 2001. MGI markets its
products through its own sales staff which focuses primarily on domestic sales.

      MGI actively follows trends in the housing, construction and remodeling
markets in order to maintain an appropriate level of inventory and assortment of
products. Due to its high quality products, competitive prices and long history,
MGI believes it has a strong degree of customer loyalty.

      Competition
      MGI's lumber is sold in highly competitive markets. Competition is
generally based upon a combination of price, service, product availability and
product quality. MGI's products compete not only with other wood products but
with metals, masonry, plastic and other construction materials made from
non-renewable resources. The level of demand for MGI's products is dependent on
such broad factors as overall economic conditions, interest rates and
demographic trends. In addition, competitive considerations, such as total
industry production and competitors' pricing, as well as the price of other
construction products, affect the sales prices for MGI's lumber products.
Competition in the common grade redwood and Douglas-fir lumber market is
intense, with MGI competing with numerous large and small lumber producers. MGI
primarily competes with the northern California mills of Georgia Pacific, Eel
River and Redwood Empire.

      Employees
      As of March 1, 2002, MGI had approximately 1,100 employees, none of whom
are covered by a collective bargaining agreement.

      Relationships with Scotia LLC and Britt
      Scotia LLC's foresters, wildlife and fisheries biologists, geologists and
other personnel are responsible for providing a number of forest stewardship
techniques, including protecting the timber located on the Scotia LLC
Timberlands from forest fires, erosion, insects and other damage, overseeing
reforestation activities and monitoring environmental and regulatory compliance.
Scotia LLC's personnel are also responsible for preparing THPs and updating the
information contained in the GIS. See "--Harvesting Practices" above for a
description of the GIS updating process and the THP preparation process.

      Scotia LLC and Pacific Lumber are parties to several agreements between
themselves, including a master purchase agreement and a services agreement,
relating to the conduct of their forest products' operations. The master
purchase agreement governs the sale to Pacific Lumber by Scotia LLC of logs
harvested from the Scotia LLC Timberlands. Under the services agreement, Pacific
Lumber provides operational, management and related services to Scotia LLC with
respect to the Scotia LLC Timberlands. Scotia LLC and Pacific Lumber are also
parties to agreements providing for reciprocal rights of ingress and egress
through their respective properties, the indemnification of Scotia LLC by
Pacific Lumber for environmental liabilities incurred in connection with the
Scotia LLC Timberlands, and certain services provided by Scotia LLC to Pacific
Lumber.

      Pacific Lumber is also a party to an agreement with Britt (the "BRITT
AGREEMENT") which governs the sale of logs by Pacific Lumber and Britt to each
other, the sale of hog fuel (wood residue) by Britt to Pacific Lumber for use in
Pacific Lumber's cogeneration plant, the sale of lumber by Pacific Lumber and
Britt to each other, and the provision by Pacific Lumber of certain
administrative services to Britt (including accounting, purchasing, data
processing, safety and human resources services).

   REGULATORY AND ENVIRONMENTAL FACTORS

      This section contains statements which constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. See Item 1. "Business--General" in this section for cautionary
information with respect to such forward-looking statements.

      General
      Pacific Lumber's business is subject to the Environmental Plans and a
variety of California and federal laws and regulations dealing with timber
harvesting, threatened and endangered species and habitat for such species, and
air and water quality. Compliance with such laws and regulations also plays a
significant role in Pacific Lumber's business. The California Forest Practice
Act (the "FOREST PRACTICE ACT") and related regulations adopted by the
California Board of Forestry and Fire Protection (the "BOF") set forth detailed
requirements for the conduct of timber harvesting operations in California.
These requirements include the obligation of timber companies to obtain
regulatory approval of detailed THPs containing information with respect to
areas proposed to be harvested (see "--Harvesting Practices" above). California
law also requires large timber companies submitting THPs to demonstrate that
their proposed timber operations will not decrease the sustainable productivity
of their timberlands. See "--Timber and Timberlands" above. The federal
Endangered Species Act (the "ESA") and California Endangered Species Act (the
"CESA") provide in general for the protection and conservation of specifically
listed wildlife and plants which have been declared to be endangered or
threatened. These laws generally prohibit the take of certain species, except
for incidental takes pursuant to otherwise lawful activities which do not
jeopardize the continued existence of the affected species and which are made in
accordance with an approved habitat conservation plan and related incidental
take permits. A habitat conservation plan, among other things, analyzes the
potential impact of the incidental take of species and specifies measures to
monitor, minimize and mitigate such impact. The operations of Pacific Lumber are
also subject to the California Environmental Quality Act (the "CEQA"), which
provides for protection of the state's air and water quality and wildlife, and
the California Water Quality Act and federal Clean Water Act, which require that
Pacific Lumber conduct its operations so as to reasonably protect the water
quality of nearby rivers and streams. Compliance with such laws, regulations and
judicial and administrative interpretations, together with other regulatory and
environmental matters, have resulted in restrictions on the scope and timing of
its timber operations, increased operational costs and engendered litigation and
other challenges to its operations.

      The Environmental Plans
      The Environmental Plans, consisting of the HCP and the SYP, were approved
by the applicable federal and state regulatory agencies upon the consummation of
the Headwaters Agreement. In connection with approval of the Environmental
Plans, incidental take permits ("PERMITS") were issued with respect to certain
threatened, endangered and other species found on the Scotia LLC Timberlands.
The Permits cover the 50-year term of the HCP and allow incidental takes of 17
different species covered by the HCP, including four species which are found on
the Scotia LLC Timberlands and had previously been listed as endangered or
threatened under the ESA and/or the CESA. The agreements which implement the
Environmental Plans also provide for various remedies (including the issuance of
written stop orders and liquidated damages) in the event of a breach by Scotia
LLC of these agreements or the Environmental Plans.

      Under the Environmental Plans, harvesting activities are prohibited or
restricted on certain areas of the Scotia LLC Timberlands. For a 50-year period,
harvesting activities are severely restricted in several areas (consisting of
substantial quantities of old growth redwood and Douglas-fir timber) to serve as
habitat conservation areas for the marbled murrelet, a coastal seabird, and
certain other species. Harvesting in certain other areas of the Scotia LLC
Timberlands is currently prohibited while these areas are evaluated for the
potential risk of landslide and the degree to which harvesting activities will
be prohibited or restricted in the future. Further, additional areas alongside
streamsides have been designated as buffers, in which harvesting is prohibited
or restricted, to protect aquatic and riparian habitat. Streamside buffers and
retrictions related to potential landslide prone acres may be adjusted up or
down, subject to certain minimum and maximum buffers, based upon an ongoing
watershed analysis process, which the HCP requires be completed within five
years of its effective date. The first analysis by the Company of a watershed,
Freshwater, was released in June 2001. This analysis was used by the Company to
develop proposed harvesting prescriptions. Because the Company and the
government agencies were unable to reach agreement on the appropriate
prescriptions, the matter is being reviewed by an independent panel of
scientists. Analyses for two additional watersheds are currently undergoing
agency review. Pacific Lumber and the agencies are working to streamline the
watershed analysis process prior to beginning up to two more watershed studies
in 2002.

      The HCP also imposes certain restrictions on the use of roads on the
timberlands covered by the HCP during several months of the year and during
periods of wet weather, except for certain limited situations. However, Pacific
Lumber anticipates that some harvesting will be able to be conducted during
these other months. The HCP also requires that 75 miles of roads be stormproofed
on an annual basis (within a specified six month period) and that certain other
roads must be built or repaired (within a specified five month period).

      The HCP contains an adaptive management provision, which various
regulatory agencies have clarified will be implemented on a timely and efficient
basis, and in a manner which will be both biologically and economically sound.
This provision allows the Palco Companies to propose changes to any of the HCP
prescriptions based on, among other things, certain economic considerations. The
regulatory agencies have also clarified that in applying this adaptive
management provision, to the extent the changes proposed do not result in the
jeopardy of a particular species, the regulatory agencies will consider the
practicality of the suggested changes, including the cost and economic
feasibility and viability. Pacific Lumber and the agencies are currently
discussing proposed adaptive management changes related to roads, streamside
buffers, wildlife and rate plants.

      Water Quality
      Under the Federal Clean Water Act, the Environmental Protection Agency
(the "EPA") is required to establish total maximum daily load limits ("TMDLS")
in water courses that have been declared to be "water quality impaired." The EPA
and the North Coast Regional Water Quality Control Board (the "NORTH COAST WATER
BOARD") are in the process of establishing TMDLs for 17 northern California
rivers and certain of their tributaries, including certain water courses that
flow within the Scotia LLC Timberlands. The Company expects this process to
continue into 2010. In December 1999, the EPA issued a report dealing with TMDLs
on two of the nine water courses. The agency indicated that the requirements
under the HCP would significantly address the sediment issues that resulted in
TMDL requirements for these water courses. However, a September 2000 report by
the staff of the North Coast Water Board proposed various actions, including
restrictions on harvesting beyond those required under the HCP. Establishment of
the final TMDL requirements applicable to the Company's timberlands will be a
lengthy process, and the final TMDL requirements applicable to the Company's
timberlands may require aquatic protection measures that are different from or
in addition to the prescriptions to be developed pursuant to the watershed
analysis process provided for in the HCP.

      Impact of Future Legislation
      Laws, regulations and related judicial decisions and administrative
interpretations dealing with Pacific Lumber's business are subject to change and
new laws and regulations are frequently introduced concerning the California
timber industry. From time to time, bills are introduced in the California
legislature and the U.S. Congress which relate to the business of Pacific
Lumber, including the protection and acquisition of old growth and other
timberlands, threatened and endangered species, environmental protection, air
and water quality and the restriction, regulation and administration of timber
harvesting practices. In addition to existing and possible new or modified
statutory enactments, regulatory requirements and administrative and legal
actions, the California timber industry remains subject to potential California
or local ballot initiatives and evolving federal and California case law which
could affect timber harvesting practices. It is not possible to assess the
effect of such future legislative, judicial and administrative events on Pacific
Lumber or its business.

      Timber Operations
      In order to conduct logging operations, stormproofing and certain other
activities, a company must obtain from the CDF a Timber Operator's License. In
December 2001, Pacific Lumber was granted a Timber Operator's License for 2002.
Pacific Lumber had historically conducted logging operations on the Scotia LLC
Timberlands with its own staff of logging personnel as well as through contract
loggers. However, effective April 1, 2002, Pacific Lumber ended its internal
logging operations and intends to rely exclusively on third party contract
loggers to conduct these activities in the future.

ALUMINUM OPERATIONS

   GENERAL

      This section contains statements which constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. See Item 1. "Business--General" and below for cautionary information
with respect to such forward-looking statements.

      Kaiser operates in several principal aspects of the aluminum industry--the
mining of bauxite, the refining of bauxite into alumina, the production of
primary aluminum from alumina, and the manufacture of fabricated (including
semi- fabricated) aluminum products. In addition to the production utilized by
Kaiser in its operations, Kaiser sells significant amounts of alumina and
primary aluminum in domestic and international markets. References in this
Report to tons refer to metric tons of 2,204.6 pounds.

   REORGANIZATION PROCEEDINGS

      This section contains statements which constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. See Item 1. "Business--General" and below for cautionary information
with respect to such forward-looking statements.

      The Debtors filed the Cases in the Court for reorganization under Chapter
11 of the Code. None of KACC's non- U.S. affiliates were included in the Cases.
The Cases are being jointly administered by the Debtors managing their
businesses in the ordinary course as debtors-in-possession subject to the
control and supervision of the Court.

      The Cases were filed as a result of liquidity and cash flow problems of
Kaiser arising in late 2001 and early 2002. Kaiser was facing significant
near-term debt maturities at a time of unusually weak aluminum industry business
conditions, depressed aluminum prices and a broad economic slowdown that was
further exacerbated by the events of September 11, 2001. In addition, Kaiser had
become increasingly burdened by the asbestos litigation and growing legacy
obligations for retiree medical and pension costs. The confluence of these
factors created the prospect of continuing operating losses and negative cash
flow, resulting in lower credit ratings and an inability to access the capital
markets.

      The following table sets forth certain 2001 financial information for the
Debtors and non-Debtors.


                                                                                      Consolidation/
                                                                                       Elimination
                                                         Debtors       non-Debtors       Entries      Consolidated
                                                      -------------  ---------------  -------------  --------------
                                                                              (In millions)
                                                                     ---------------  -------------  --------------

Net sales...........................................  $    1,252.8   $        592.7   $     (112.8)  $     1,732.7
Operating income....................................          66.0             11.3          (12.4)           64.9
Net income (loss)...................................        (445.9)            11.7          (25.2)         (459.4)

Current assets......................................  $      607.6   $        151.6   $          -   $       759.2
Current liabilities.................................         702.0            101.4              -           803.4
Total assets........................................       2,449.8          1,654.7       (1,360.8)        2,743.7
Total liabilities and minority interests............       2,890.9            274.2           19.7         3,184.8
Total equity (deficit)..............................        (441.1)         1,380.5       (1,380.5)         (441.1)

      Kaiser's objective is to achieve the highest possible recoveries for all
creditors and stockholders, consistent with the Debtors' abilities to pay and
the continuation of their businesses. However, there can be no assurance that
the Debtors will be able to attain these objectives or achieve a successful
reorganization. Further, there can be no assurance that the liabilities of the
Debtors will not be found in the Cases to exceed the fair value of their assets.
This could result in claims being paid at less than 100% of their face value and
the equity of Kaiser's stockholders being diluted or cancelled. At this time, it
is not possible to predict the outcome of the Cases, in general, or the effect
of the Cases on the businesses of the Debtors or on the interests of creditors
and stockholders.

      On April 12, 2002, Kaiser filed with the Court a motion seeking an order
of the Court prohibiting the Company (or MAXXAM), without first seeking Court
relief, from making any disposition of its stock of Kaiser, including any sale,
transfer, or exchange of such stock or treating any of its Kaiser stock as
worthless for federal income tax purposes. Kaiser indicated in its Court filing
that it was concerned that such a transaction could have the effect of depriving
Kaiser of the ability to utilize the full value of its net operating losses,
foreign tax credits and minimum tax credits. The Company is in the process of
analyzing the motion and other materials which were filed with the Court.

   SUMMARY OF BUSINESS OPERATIONS

      Kaiser's operations are conducted through its business units. The
following table sets forth production and third party purchases of bauxite,
alumina and primary aluminum and third party shipments and intersegment
transfers of bauxite, alumina, primary aluminum and fabricated products for the
years ended December 31, 2001, 2000 and 1999:


                                                       Sources(1)                    Uses(1)
                                              ---------------------------- --------------------------

                                                            Third Party    Third Party   Intersegment
                                              Production     Purchases      Shipments      Transfers
                                             ------------   -----------    -----------   ------------
                                                               (In thousands of tons)
Bauxite
   2001..................................     5,628.3         1,916.3      1,512.2          4,355.4
   2000..................................     4,305.0         2,290.0      2,007.0          2,342.0
   1999..................................     5,261.0         2,251.6      1,497.0          3,515.0
Alumina
   2001..................................     2,813.9 (2)       115.0      2,582.7            422.8
   2000..................................     2,042.9           322.0      1,927.1            751.9
   1999..................................     2,524.0           395.0      2,093.9            757.3
Primary Aluminum
   2001..................................       214.3           214.4        437.2 (3)
   2000..................................       411.4           206.5        672.4 (3)            -
   1999..................................       426.4           260.1        684.6 (3)            -
---------------

(1)      Sources and uses will not equal due to the impact of inventory changes
         and alumina and metal swaps.
(2)      During September 2001, Kaiser sold an 8.3% interest in Queensland
         Alumina Limited ("QAL").  See "--Business Operations--Bauxite and
         Alumina Business Unit" below for a discussion of the effects of the
         sale on alumina production. (3) Includes both primary aluminum
         shipments and pounds of aluminum contained in fabricated aluminum
         product shipments.

   BUSINESS OPERATIONS

      This section contains statements which constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. See Item 1. "Business--General" and below for cautionary information
with respect to such forward-looking statements.

      Kaiser conducts its operations through its five main business units
(bauxite and alumina, primary aluminum, commodities marketing, flat-rolled
products and engineered products), each of which is discussed below.

      Bauxite and Alumina Business Unit
      The following table lists Kaiser's bauxite mining and alumina refining
facilities as of December 31, 2001:


                                                                             ANNUAL
                                                                           PRODUCTION          TOTAL
                                                                            CAPACITY          ANNUAL
                                                              KAISER      AVAILABLE TO      PRODUCTION
        ACTIVITY              FACILITY        LOCATION       OWNERSHIP       KAISER          CAPACITY
------------------------    -------------    -----------   ------------   ------------     ------------
                                                                             (IN THOUSANDS OF TONS)

Bauxite Mining              KJBC(1)          Jamaica           49.0%           4,500.0          4,500.0
                            Alpart(2)        Jamaica           65.0%           2,275.0          3,500.0
                                                                          ------------     ------------
                                                                               6,775.0          8,000.0
                                                                          ============     ============

Alumina Refining            Gramercy         Louisiana        100.0%           1,250.0          1,250.0
                            Alpart           Jamaica           65.0%             942.5          1,450.0
                            QAL(3)           Australia         20.0%               730          3,650.0
                                                                          ------------     ------------
                                                                               2,922.5          6,350.0
                                                                          ============     ============

------------------



(1)   Kaiser Jamaica Bauxite Company ("KJBC").
(2) Alumina Partners of Jamaica ("ALPART") bauxite is refined into alumina at
the Alpart refinery. (3) During September 2001, Kaiser sold an 8.3% interest in
QAL.

      Kaiser is a major producer of alumina and sells significant amounts of its
alumina production in domestic and international markets. Kaiser's strategy is
to sell a substantial portion of the alumina available to it in excess of its
internal smelting requirements under multi-year sales contracts with prices
linked to the price of primary aluminum.

      On July 5, 1999, Kaiser's Gramercy, Louisiana alumina refinery was
extensively damaged by an explosion in the digestion area of the plant. A number
of employees were injured in the incident, several of them severely. Production
at the facility was completely curtailed until the middle of December 2000 at
which time partial production commenced. Construction at the facility was
substantially completed during the third quarter of 2001. During the first nine
months of 2001, the plant operated at approximately 68% of its newly rated
estimated annual capacity of 1,250,000 tons. During the fourth quarter of 2001,
the plant operated at approximately 90% of its newly-rated capacity. By the end
of February 2002, the plant was operating at just below 100% of its newly-rated
capacity. The facility is now focusing its efforts on achieving its full
operating efficiency. See Note 2 to the Consolidated Financial Statements of
Kaiser, which are included as Exhibit 99.3 hereto, for more detailed information
regarding the impact of the Gramercy incident.

      Primary Aluminum Business Unit
      The following table lists Kaiser's primary aluminum smelting facilities as
of December 31, 2001:


                                                                    ANNUAL
                                                                     RATED          TOTAL
                                                                   CAPACITY        ANNUAL       2001
                                                     COMPANY     AVAILABLE TO       RATED     OPERATING
            LOCATION                  FACILITY      OWNERSHIP     THE COMPANY     CAPACITY      RATE
-------------------------------      -----------  ------------   -------------   ----------  -----------
                                                                    (IN THOUSANDS OF TONS)
                                                                                 ----------
Domestic:
      Washington                     Mead              100%             200.0        200.0         -%(1)
      Washington                     Tacoma            100%              73.0         73.0         -%(1)
                                                                 -------------   ----------
           Subtotal                                                     273.0        273.0
                                                                 -------------   ----------

International:
      Ghana                          Valco              90%             180.0        200.0        81%
      Wales, United Kingdom          Anglesey           49%              66.2        135.0       102%
                                                                 -------------   ----------
           Subtotal                                                     246.2        335.0
                                                                 -------------   ----------

           Total                                                        519.2        608.0
                                                                 =============   ==========
------------------

(1)  Production was completely curtailed during 2001.

         The process of converting alumina into aluminum requires significant
amounts of electric power. Electric power represents an important production
input for Kaiser at its aluminum smelters, and its cost can significantly affect
Kaiser's profitability. Kaiser has historically purchased a significant portion
of its electric power for the Mead and Tacoma, Washington, smelters from the
Bonneville Power Administration ("BPA"). Over recent years, the BPA has supplied
approximately half of the electric power for the two plants, with the balance
coming from other suppliers.

      In response to the unprecedented high market prices for power in the
Pacific Northwest, Kaiser temporarily curtailed primary aluminum production at
the Tacoma and Mead, Washington, smelters during the second half of 2000 and all
of 2001. During this same period Kaiser sold the available power it had under
contract through September 30, 2001. As a result of the curtailments, Kaiser
avoided the need to purchase power on a variable market price basis and received
cash proceeds sufficient to more than offset the cash impact of the potline
curtailments over the period for which the power was sold. As of December 31,
2001, both the Mead and Tacoma, Washington, smelters were completely curtailed
and are expected to remain curtailed at least through early 2003. However,
Kaiser continues to operate the Tacoma rod-mill.

      Also, during October 2000, Kaiser signed a new power contract with the BPA
under which the BPA will provide Kaiser's operations in the State of Washington
with up to approximately 290 megawatts of power through September 2006. The
contract provides Kaiser with sufficient power to fully operate the Flat-Rolled
Products Business Unit's Trentwood facility (which requires up to an approximate
40 megawatts) as well as approximately 40% of the combined capacity of Kaiser's
Mead and Tacoma smelting operations. The BPA has announced that it currently
intends to set rates under the contract in six month increments. The rate for
the initial period (from October 1, 2001 through March 31, 2002) was
approximately 46% higher than power costs under the prior contract. Power prices
for the April 2002 through the September 2002 period are essentially unchanged
from the prior six-month period. Kaiser cannot predict what rates will be
charged in future periods. Kaiser does not have any remarketing rights under the
new BPA contract. See Note 7 to the Consolidated Financial Statements of Kaiser,
which are included as Exhibit 99.3 hereto, for additional information on these
matters.

      Commodities Marketing Business Unit
      Kaiser's operating results are sensitive to changes in the prices of
alumina, primary aluminum, and fabricated aluminum products, and also depend to
a significant degree upon the volume and mix of all products sold. Primary
aluminum prices have historically been subject to significant cyclical
fluctuations. Alumina prices, as well as fabricated aluminum product prices
(which vary considerably among products), are significantly influenced by
changes in the price of primary aluminum and generally lag behind primary
aluminum prices by up to three months. From time to time in the ordinary course
of business, Kaiser enters into hedging transactions to provide risk management
in respect of its net exposure of earnings and cash flow related to primary
aluminum price changes. Given the significance of primary aluminum hedging
activities, Kaiser has began (starting with the year ended December 31, 2000)
reporting its primary aluminum-related hedging activities as a separate segment.
Primary aluminum-related hedging activities are managed centrally on behalf of
all of Kaiser's business segments to minimize transaction costs, monitor
consolidated net exposures and to allow for increased responsiveness to changes
in market factors. Because the agreements underlying Kaiser's hedging positions
provided that the counterparties to the hedging contracts could liquidate
Kaiser's hedging positions if Kaiser filed for reorganization, Kaiser chose to
liquidate these positions in advance of the Filing Date. Gains or losses
associated with these liquidated positions have been deferred and are being
recognized over the original hedging periods as the underlying purchases/sales
are still expected to occur. Kaiser anticipates that, subject to the approval of
the Court and prevailing economic conditions, it may, reinstitute an active
hedging program to protect the interests of its constituents. However, no
assurance can be given as to when or if the appropriate Court approval will be
obtained or when or if such hedging activities will restart. See Item 7A.
"Quantitative and Qualitative Disclosures about Market Risk" and Notes 1 and 10
to the Consolidated Financial Statements of Kaiser, which are included as
Exhibit 99.3 hereto, for further information.

      Flat-Rolled Products Business Unit
      The flat-rolled products business unit operates the Trentwood, Washington,
rolling mill. During recent years, the business unit has sold to the aerospace,
transportation and industrial markets (producing heat treat sheet and plate
products and automotive brazing sheet) and the beverage container market
(producing lid and tab stock), both directly and through distributors.

      During 2000, KACC shifted the product mix of its Trentwood rolling mill
toward higher value-added product lines, and exited beverage can body stock,
wheel and common alloy products in an effort to enhance its profitability.
Kaiser continues to reassess the product mix of its Trentwood rolling mill, and
has concluded that the business unit's profitability can be enhanced by further
focusing resources on its core, heat-treat business and by exiting lid and tab
stock product lines used in the beverage container market and brazing sheet for
the automotive market.

      Engineered Products Business Unit
      The engineered products business unit operates soft-alloy extrusion
facilities in Los Angeles, California; Sherman, Texas; Tulsa, Oklahoma;
Richmond, Virginia; and London, Ontario, Canada; rod and bar extrusion
facilities in Newark, Ohio, and Jackson, Tennessee, which produce screw machine
stock, redraw rod, forging stock, and billet; and a facility in Richland,
Washington, which produces seamless tubing in both hard and soft alloys for the
automotive, other transportation, export, recreation, agriculture and other
industrial markets. The business unit also produces drawn tube in both hard and
soft alloys at facilities in Chandler, Arizona, and Richmond, Virginia.

      The business unit also operates forging facilities at Oxnard, California,
and Greenwood, South Carolina. The business unit sells forged parts to customers
in the automotive, commercial vehicle and ordnance markets.

   COMPETITION

      This section contains statements which constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. See Item 1. "Business--General" in this section for cautionary
information with respect to such forward-looking statements.

      Kaiser competes globally with producers of bauxite, alumina, primary
aluminum, and fabricated aluminum products. Many of Kaiser's competitors have
greater financial resources than Kaiser. Primary aluminum and, to some degree,
alumina are commodities with generally standard qualities, and competition in
the sale of these commodities is based primarily upon price, quality and
availability. Aluminum competes in many markets with steel, copper, glass,
plastic, and other materials. Kaiser competes with numerous domestic and
international fabricators in the sale of fabricated aluminum products. Kaiser
markets fabricated aluminum products it manufactures in the United States and
abroad. Sales are made directly and through distributors to a large number of
customers. Competition in the sale of fabricated products is based upon quality,
availability, price and service, including delivery performance. Kaiser
concentrates its fabricating operations on selected products in which it
believes it has production expertise, high-quality capability, and geographic
and other competitive advantages. Kaiser believes that, assuming the current
relationship between worldwide supply and demand for alumina and primary
aluminum does not change materially, the loss of any one of Kaiser's customers,
including intermediaries, would not have a material adverse effect on its
financial condition or results of operations. See also the description of the
business units above.

      LABOR MATTERS

      As a result of the September 1998 strike by the United Steelworkers of
America ("USWA") and the subsequent "lock-out" by Kaiser in January 1999, and
prior to the settlement in September 2000, Kaiser was operating five of its U.S.
facilities with salaried employees and other employees. Under the terms of the
settlement, USWA members generally returned to the affected plants during
October 2000. Although the USWA dispute has been settled and the workers have
returned to the facilities, two allegations of unfair labor practices ("ULPS")
remain in connection with the USWA strike and subsequent lock-out. Kaiser
believes that these charges are without merit. See Note 12 to the Consolidated
Financial Statements of Kaiser, which are included as Exhibit 99.3 hereto, for a
discussion of the ULPs.

      ASBESTOS-RELATED LIABILITY AND EXPECTED RECOVERIES

      Kaiser is a defendant in a number of asbestos lawsuits that generally
relate to products it has not sold for more than 20 years. Kaiser believes that
it has insurance coverage available to recover a substantial portion of its
asbestos-related costs. For the year ended December 31, 2001, a total of
approximately $116.6 million of asbestos-related settlements and defense costs
were paid and partial insurance reimbursements for asbestos-related matters
totaling approximately $90.3 million were received. See Note 12 to the
Consolidated Financial Statements of Kaiser, which are included as Exhibit 99.3
hereto, for additional information.

      MISCELLANEOUS

      For further information concerning the business and financial condition of
Kaiser, see Kaiser's Consolidated Financial Statements and the notes thereto
(Exhibit 99.3 hereto), as well as Kaiser's Annual Report on Form 10-K for the
fiscal year ended December 31, 2001. Such Exhibit and Form 10-K are available at
no charge by writing to the following address: Kaiser Aluminum Corporation,
Shareholder Services Department, 5847 San Felipe, Suite 2600, Houston, Texas
77057.

ITEM 2.  PROPERTIES

      A description of the Company's properties is included under Item 1 above.


ITEM 3.  LEGAL PROCEEDINGS

      This section contains statements which constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. See Item 1. "Business--General" for cautionary information with respect
to such forward-looking statements.

TIMBER HARVESTING LITIGATION

      On January 28, 1997, an action was filed against Pacific Lumber entitled
Ecological Rights Foundation, Mateel Environmental v. Pacific Lumber (the "ERF
LAWSUIT") in the U.S. District Court in the Northern District of California (No.
97-0292). This action alleges that Pacific Lumber has discharged pollutants into
federal waterways, and plaintiffs are seeking to enjoin Pacific Lumber from
continuing such actions, civil penalties of up to $25,000 per day for each
violation, remediation and other damages. This case was dismissed by the
District Court on August 19, 1999, but the dismissal was reversed by the U.S.
Court of Appeals for the Ninth Circuit on October 30, 2000 and the case was
remanded to the District Court. On September 26, 2001, the plaintiffs sent
Pacific Lumber a 60 day notice alleging that Pacific Lumber continues to violate
the CWA by discharging pollutants into certain waterways. Pacific Lumber has
taken certain remedial actions since its receipt of the notice. The Company
believes that it has strong factual and legal defenses with respect to the ERF
lawsuit; however, there can be no assurance that it will not have a material
adverse effect on its financial position, results of operations or liquidity.

      On December 2, 1997, a lawsuit entitled Kristi Wrigley, et al. v. Charles
Hurwitz, John Campbell, Pacific Lumber, MAXXAM Group Holdings Inc., Scotia
Pacific Holding Company, MAXXAM Group Inc., MAXXAM Inc., Scotia Pacific Company
LLC, et al. (No. 9700399) (the "WRIGLEY LAWSUIT") was filed in the Superior
Court of Humboldt County. This action alleges, among other things, that
defendants' logging practices have contributed to an increase in flooding and
damage to domestic water systems in a portion of the Elk River watershed.
Plaintiffs further allege that in order to have THPs approved in connection with
these areas, the defendants submitted false information to the CDF in violation
of California's business and professions code and the Racketeering Influence and
Corrupt Practices Act. The Company believes that it has strong factual and legal
defenses with respect to the Wrigley lawsuit; however, there can be no assurance
that it will not have a material adverse effect on its consolidated financial
position, results of operations or liquidity.

      On March 31, 1999, an action entitled Environmental Protection Information
Association, Sierra Club v. California Department of Forestry and Fire
Protection, California Department of Fish and Game, The Pacific Lumber Company,
Scotia Pacific Company LLC, Salmon Creek Corporation, et al. (No. 99CS00639)
(the "EPIC-SYP/PERMITS LAWSUIT") was filed alleging, among other things, that
the CDF and the CDFG violated the CEQA and the CESA, and challenging, among
other things, the validity and legality of the SYP and the Permits issued by
California. This action is now pending in Humboldt County, California (No.
CV-990445). The plaintiffs seek, among other things, injunctive relief to set
aside the CDF's and the CDFG's decisions approving the SYP and the Permits
issued by California. The Court recently denied the plaintiffs' motion for
injunctive relief, and set a trial date of August 5, 2002. On March 31, 1999, an
action entitled United Steelworkers of America, AFL-CIO, CLC, and Donald Kegley
v. California Department of Forestry and Fire Protection, The Pacific Lumber
Company, Scotia Pacific Company LLC and Salmon Creek Corporation (No. 99CS00626)
(the "USWA LAWSUIT") was also filed challenging the validity and legality of the
SYP. This case is set for trial on June 10, 2002. The Company believes that
appropriate procedures were followed throughout the public review and approval
process concerning the Environmental Plans, and the Company is working with the
relevant government agencies to defend these challenges. Although uncertainties
are inherent in the final outcome of the EPIC-SYP/Permits lawsuit and the USWA
lawsuit, the Company believes that the resolution of these matters should not
result in a material adverse effect on its financial condition, results of
operations or the ability to harvest timber.

      On July 24, 2001, a lawsuit entitled Environmental Protection Information
Association v. Pacific Lumber, Scotia Pacific Company LLC (No. CD1-2821) was
filed in the U.S. District Court in the Northern District of California (the
"BEAR CREEK LAWSUIT"). The lawsuit alleges that the Company and Pacific Lumber's
harvesting and other activities under certain of its approved and proposed THPs
will result in discharges of pollutants in violation of the CWA. The plaintiff
asserts that the CWA requires the defendants to obtain a permit from the North
Coast Water Board before beginning timber harvesting and road construction
activities in the Bear Creek watershed, and is seeking to enjoin these
activities until such permit has been obtained. The plaintiff also seeks civil
penalties of up to $27,000 per day for the defendant's alleged continued
violation of the CWA. The Company believes that the requirements under the HCP
are adequate to ensure that sediment and pollutants from its harvesting
activities will not reach levels harmful to the environment. Furthermore, EPA
regulations specifically provide that such activities are not subject to CWA
permitting requirements. The Company continues to believe that it has strong
legal defenses in this matter; however, there can be no assurance that this
lawsuit will not have a material adverse effect on its consolidated financial
condition or results of operations.

OTHER LITIGATION MATTERS

      Kaiser is involved in significant legal proceedings, including asbestos
and environmental litigation as well as litigation involving the Gramercy
incident and the USWA strike. For further information, see Item 1.
"Business--Aluminum Operations--Business Operations," "--Labor Matters,"
"--Asbestos-Related Liability and Expected Recoveries" and "--Miscellaneous" as
well as Notes 2, 5 and 12 to Kaiser's Consolidated Financial Statements (Exhibit
99.3 hereto).

      The Company is involved in other claims, lawsuits and other proceedings.
While uncertainties are inherent in the final outcome of such matters and it is
presently impossible to determine the actual costs that ultimately may be
incurred or their effect on the Company, management believes that the resolution
of such uncertainties and the incurrence of such costs should not have a
material adverse effect on the Company's consolidated financial position,
results of operations or liquidity.

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

      Not applicable.
                                     PART II

ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
          MATTERS

      All of the Company's common stock is owned by MAXXAM. Accordingly, the
Company's common stock is not traded on any stock exchange and has no
established public trading market. The 12% Senior Secured Notes due 2003 of the
Company (the "MGHI NOTES") are secured by the common stock of MGI, 23,443,953
shares of the common stock of Kaiser owned by the Company and a note receivable
from MAXXAM. See Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Financial Condition and Investing and
Financing Activities" and Note 8 to the Consolidated Financial Statements
appearing in Item 8.

ITEM 6.   SELECTED FINANCIAL DATA

      Not applicable.

ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS

BACKGROUND

      This section contains statements which constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. See Item 1. "Business--General" for cautionary information with respect
to such forward-looking statements.

      The Company's wholly owned subsidiary, MGI, and its operating
subsidiaries, Pacific Lumber and Britt, are engaged primarily in forest products
operations. In addition, the Company added real estate operations to its
business with the June 2001 acquisition of Lake Pointe Plaza, an office complex
located in Sugar Land, Texas. The Company's forest products business is somewhat
seasonal, and its net sales have been historically higher in the months of April
through November than in the months of December through March. Management
expects that this segment's revenues and cash flows will continue to be somewhat
seasonal. Accordingly, the segment's results for any one quarter are not
necessarily indicative of results to be expected for the full year. Real estate
operations do not have any seasonality elements impacting the quarterly results.

      Regulatory and environmental matters play a significant role in the
Company's forest products operations. See Item 1. "Business--Forest Products
Operations--Regulatory and Environmental Factors" and Note 12 to the
Consolidated Financial Statements for a discussion of these matters. Regulatory
compliance and related litigation have caused delays in obtaining approvals of
THPs and delays in harvesting on THPs once they are approved. This has resulted
in a decline in harvest, an increase in the cost of logging operations, and
lower net sales.

      Since the consummation of the Headwaters Agreement in March 1999, there
has been a significant amount of work required in connection with the
implementation of the Environmental Plans, and this work is expected to continue
for several more years. During the implementation period, government agencies
had until recently failed to approve THPs in a timely manner. The rate of
approvals of THPs during 2001 improved over that for the prior year, and further
improvements have been experienced thus far in 2002. However, it continues to be
below levels which meet Pacific Lumber's expectations. Nevertheless, Pacific
Lumber anticipates that once the Environmental Plans are fully implemented, the
process of preparing THPs will become more streamlined, and the time to obtain
approval of THPs will potentially be shortened.

      While the Company has experienced recent improvements in the THP approval
process, there can be no assurance that Pacific Lumber will not in the future
have difficulties in receiving approvals of its THPs similar to those
experienced in the past. Furthermore, there can be no assurance that certain
pending legal, regulatory and environmental matters or future governmental
regulations, legislation or judicial or administrative decisions, adverse
weather conditions or low selling prices, would not have a material adverse
effect on the Company's financial position, results of operations or liquidity.
See Item 3. "Legal Proceedings" and Note 12 to the Consolidated Financial
Statements for further information regarding regulatory and legal proceedings
affecting the Company's operations.

      During 2001, comprehensive external and internal reviews were conducted of
Pacific Lumber's business operations. These reviews were an effort to identify
ways in which Pacific Lumber could operate on a more efficient and cost
effective basis. Based upon the results of these reviews, Pacific Lumber, among
other things, indefinitely idled two of its four sawmills, eliminated certain of
its operations, including its soil amendment and concrete block activities, has
began utilizing more efficient harvesting methods and adopted certain other cost
saving measures. Most of these changes were implemented by Pacific Lumber in the
last quarter of 2001, or the first quarter of 2002. Pacific Lumber also ended
its internal logging operations as of April 1, 2002, and intends to rely
exclusively on third party contract loggers to conduct these activities in the
future. In connection with the changes described above, the Company recognized a
writedown of $2.2 million for impaired assets, a $2.6 million charge for
restructuring initiatives, and a $3.4 million charge for environmental
remediation costs during 2001 (see Note 2 to the Consolidated Financial
Statements). If business performance does not improve, additional restructuring
charges may be necessary, and the Company could have a significant liquidity issue.

      The Company owns 27,938,250 shares of Kaiser common stock (the "KAISER
SHARES") representing a 34.6% interest in Kaiser on a fully diluted basis as of
December 31, 2001. The Company follows the equity method of accounting for its
investment in Kaiser. As a result of losses reported by Kaiser in 2001, the
Company's investment in Kaiser was zero as of December 31, 2001. On February 12,
2002, Kaiser filed a voluntary petition for reorganization under Chapter 11 of
the Code in the Court. As a result of such filing, the Company will account for
its investment in Kaiser under the cost method beginning in the first quarter of
2002 with no further recognition of equity in earnings or losses until such time
as the shares are disposed of or a plan of reorganization is implemented. See
Notes 2 and 7 to the Consolidated Financial Statements for further information,
including summarized financial information of Kaiser.

   RESULTS OF OPERATIONS

      The following table presents selected operational and financial
information for the years ended December 31, 2001, 2000 and 1999:


                                                       YEARS ENDED DECEMBER 31,
                                                    ------------------------------
                                                      2001      2000       1999
                                                    --------- ---------  ---------
                                                       (IN MILLIONS OF DOLLARS,
                                                     EXCEPT SHIPMENTS AND PRICES)
                                                    --------- ---------  ---------
Shipments:
   Lumber: (1)
      Redwood upper grades........................      16.2      15.8       24.6
      Redwood common grades.......................     165.0     143.8      137.4
      Douglas-fir upper grades....................       8.8      11.5       10.4
      Douglas-fir common grades...................      50.5      76.1       61.5
      Other.......................................       3.9       5.9        8.7
                                                    --------- ---------  ---------
        Total lumber..............................     244.4     253.1      242.6
                                                    ========= =========  =========
   Wood chips (2).................................     104.9     169.5      163.7
                                                    ========= =========  =========

Average sales price:
   Lumber: (3)
      Redwood upper grades........................  $  1,770  $  1,798   $  1,531
      Redwood common grades.......................       577       712        629
      Douglas-fir upper grades....................     1,323     1,352      1,290
      Douglas-fir common grades...................       337       376        430
   Wood chips (4).................................        64        67         77

Net sales:
   Lumber, net of discount........................  $  152.2  $  175.3   $  165.3
   Logs...........................................      10.6       3.5        0.3
   Wood chips.....................................       6.8      11.3       12.5
   Cogeneration power.............................      11.7       6.0        3.8
   Other..........................................       4.0       4.0        5.9
                                                    --------- ---------  ---------
      Total forest products.......................     185.3     200.1      187.8
   Real estate....................................       4.4         -          -
                                                    --------- ---------  ---------
      Total net sales.............................  $  189.7  $  200.1   $  187.8
                                                    ========= =========  =========
Operating income (loss) (6).......................  $  (26.5) $    7.3   $   (4.4)
                                                    ========= =========  =========
Operating cash flow (5)...........................  $   (2.3) $   27.0   $   12.6
                                                    ========= =========  =========
Income (loss) before income taxes(7)..............  $  (80.9) $   39.3   $  177.9
                                                    ========= =========  =========
Net income (loss)(8)..............................  $  (72.9) $   30.1   $  100.0
                                                    ========= =========  =========
--------------------

(1)   Lumber shipments are expressed in millions of board feet.
(2)   Wood chip shipments are expressed in thousands of bone dry units of 2,400
      pounds.
(3)   Dollars per thousand board feet.
(4)   Dollars per bone dry unit.
(5)   Operating income before depletion and depreciation and asset impairment
      charges, also referred to as "EBITDA."
(6)   Operating loss for 2001 includes unusual charges totalling $8.2 million.
      See Note 2 to the Consolidated Financial Statements for further discussion.
(7)   In addition to the special charges referred to in (6), 2001 results
      include a $16.7 million gain on the sale of the Grizzly Creek grove; 2000
      results include a $60.0 million gain on the sale of the Owl Creek grove;
      1999 results include a $239.8 million gain on the sale of the Headwaters
      Timberlands.
(8)   2001 and 2000 results include extraordinary gains of $3.6 million and
      $4.2 million, respectively, net of tax, on the repurchases of debt.

      Net Sales
      Net sales for the year ended December 31, 2001 were negatively impacted by
lower lumber prices, with lower prices for common grade redwood lumber being the
primary contributor to the decline. In addition, shipments of lumber declined
slightly versus the comparable prior year period. The Company had higher sales
volumes for redwood common grade lumber; however, this was more than offset by
lower shipments of common grade Douglas fir lumber.

      Net sales for the year ended December 31, 2000, increased over the
comparable prior year period primarily due to higher prices for redwood lumber
and higher shipments of common grade redwood and Douglas-fir lumber. These
improvements were offset in part by lower shipments of upper grade redwood
lumber due to continuing reductions in the volume of old growth logs available
for the production of lumber.

      Operating Income (Loss)
      The Company experienced an operating loss for the year ended December 31,
2001 compared to operating income for the same period of 2000. Operating results
for the year ended December 31, 2001, include the impact of several unusual
charges totaling $8.2 million (see Note 2 to the Consolidated Financial
Statements). In addition to the unusual items, gross margins on lumber sales
declined year to year as a result of higher costs associated with lumber
production and logging operations.

      The Company had operating income for the year ended December 31, 2000, as
compared to an operating loss for the comparable 1999 period, primarily due to
the increase in net sales discussed above.

      Income (Loss) Before Income Taxes
      In addition to the operating income (loss) discussed above, results for
2001, 2000 and 1999 were impacted by gains on sales of timberlands and equity in
earnings (losses) from Kaiser.


                                                            YEARS ENDED DECEMBER 31,
                                                         ------------------------------
                                                           2001      2000       1999
                                                         --------- ---------  ---------
                                                             IN MILLIONS OF DOLLARS
Operating income (loss)................................  $  (26.5) $    7.3   $   (4.4)
Gains on sales of timberlands..........................      16.7      60.0      239.8
Equity in earnings (losses) of Kaiser..................     (27.6)      5.9      (19.2)
Interest expense and other income (expense), net.......     (43.5)    (33.9)     (38.3)
                                                         --------- ---------  ---------
Income (loss) before income taxes......................  $  (80.9) $   39.3   $  177.9
                                                         ========= =========  =========

      2001 included a $16.7 million gain on the sale of a portion of the Grizzly
Creek grove ($9.9 million net of deferred taxes), 2000 included a gain on the
sale of the Owl Creek grove of $60.0 million ($35.6 million net of deferred
taxes), and 1999 included a gain on the sale of the Headwaters Timberlands of
$239.8 million ($142.1 million net of deferred taxes). The loss from Kaiser in
2001 was in large part due to valuation allowances on Kaiser's deferred tax
assets. See Notes 2 and 7 to the Consolidated Financial Statements for further
discussion of the Company's investment in Kaiser.

      Benefit in Lieu of Income Taxes
      The effective benefit in lieu of income taxes differs from the statutory
rate primarily due to changes in valuation allowances on deferred tax assets,
the exclusion of equity in earnings (loss) of Kaiser from taxable income,
and the disallowance of a portion of the Company's net operating loss
carryforwards for state tax purposes.

FINANCIAL CONDITION AND INVESTING AND FINANCING ACTIVITIES

      This section contains statements which constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. See Item 1. "Business--General" and below for cautionary information
with respect to such forward-looking statements.

      Note 8 to the Consolidated Financial Statements contains additional
information concerning the Company's indebtedness and information concerning
certain restrictive debt covenants. "MGHI PARENT" is used in this section to
refer to the Company on a stand-alone basis without its subsidiaries.

      The following table summarizes certain data related to financial condition
and to investing and financing activities of the Company and its subsidiaries.



                                                                                   MGI,
                                                                                 akepointe
                                                         Scotia      Pacific    Lssets and     MGHI
                                                          LLC        Lumber     A Other       PARENT       TOTAL
                                                       ----------  -----------  ----------  ----------  -----------
                                                                             (IN MILLIONS)

Debt and credit facilities (not including
-----------------------------------------
   intercompany notes)
   -------------------
Short-term borrowings and current maturities of
   long-term debt:
   December 31, 2001 (1).............................  $    14.9   $     17.8   $     2.8   $       -   $     35.5
   December 31, 2000.................................       14.2         37.1           -           -         51.3

Long-term debt, excluding current maturities:
   December 31, 2001(1)..............................  $   754.5   $      0.5   $   119.5   $    88.2   $    962.7
   December 31, 2000.................................      769.4          0.6           -       118.8        888.8

Revolving credit facilities:
   Facility amounts..................................  $    60.9   $     50.0   $     2.5   $       -   $    113.4
   December 31, 2001:
      Borrowings.....................................          -         17.7         0.6           -         18.3
      Letters of credit..............................          -         11.5           -           -         11.5
      Unused and available credit....................       60.9         12.2         1.9           -         75.0

Cash, cash equivalents, marketable securities and
   other investments
December 31, 2001:
   Current amounts restricted for debt service.......  $    35.3   $       -    $     0.1   $       -   $     35.4
   Other current amounts.............................       19.6          2.3        26.6        35.7         84.2
                                                       ----------  -----------  ----------  ----------  -----------
                                                            54.9          2.3        26.7        35.7        119.6
                                                       ----------  -----------  ----------  ----------  -----------

   Long-term amounts restricted for debt service.....       87.6            -           -           -         87.6
   Other long-term restricted amounts................         -             -         2.2           -          2.2
                                                       ----------  -----------  ----------  ----------  -----------
                                                            87.6            -         2.2           -         89.8
                                                       ----------  -----------  ----------------------  -----------
                                                       $   142.5   $      2.3   $    28.9   $    35.7   $    209.4
                                                       ==========  ===========  ==========  ==========  ===========

December 31, 2000:
   Current amounts restricted for debt service.......  $    45.8   $        -   $       -   $       -   $     45.8
   Other current amounts.............................       68.6          0.2        61.7        54.3        184.8
                                                       ----------  -----------  ----------  ----------  -----------
                                                           114.4          0.2        61.7        54.3        230.6
                                                       ----------  -----------  ----------  ----------  -----------

   Long-term amounts restricted for debt service.....       92.1            -           -           -         92.1
   Other long-term restricted amounts................        2.5            -         2.0           -          4.5
                                                       ----------  -----------  ----------  ----------  -----------
                                                            94.6            -         2.0           -         96.6
                                                       ----------  -----------  ----------------------  -----------
                                                       $   209.0   $      0.2   $    63.7   $    54.3   $    327.2
                                                       ==========  ===========  ==========  ==========  ===========





                                                                                   MGI,
                                                                                Lakepointe
                                                         Scotia     Pacific     Assets and     MGHI
                                                          LLC        Lumber       Other       PARENT       TOTAL
                                                       ----------  ----------   ----------  ----------- -----------
                                                                             (IN MILLIONS)
Changes in cash and cash equivalents Capital
   expenditures:
   December 31, 2001(1)..............................  $     6.2   $     5.9    $   132.6   $        -  $    144.7
   December 31, 2000.................................        8.2         4.1          1.7            -        14.0
   December 31, 1999.................................       19.2         2.6          1.3            -        23.1

Proceeds from dispositions of property and
   investments:
   December 31, 2001 (2).............................  $     1.3   $    18.5    $       -   $        -  $     19.8
   December 31, 2000(2)..............................       67.0         0.3            -            -        67.3

Borrowings (repayments)of debt and credit
   facilities, net of financing costs:
   December 31, 2001(1)..............................  $   (14.2)  $   (19.5)   $   117.1   $    (25.1) $     58.3
   December 31, 2000(1)..............................      (16.0)       37.0            -         (5.8)       15.2
   December 31, 1999(1)..............................       (9.0)       (0.1)        (4.7)           -       (13.8)

Dividends and advances received (paid):
   December 31, 2001(3)..............................  $   (79.9)  $    89.2    $   (26.4)  $     17.1  $        -
   December 31, 2000(3)..............................          -        23.7       (132.1)        63.4       (45.0)
   December 31, 1999.................................          -           -        (18.7)        18.7           -

---------------------

(1)     The increase in debt and capital expenditures for MGI and other
        subsidiaries is attributable to the Lake Pointe Plaza acquisition and
        related borrowings described in Note 3 to the Consolidated Financial
        Statements. The decrease in Scotia LLC's long-term debt between December
        31, 2000, and December 31, 2001, was the result of principal payments on
        the Timber Notes of $14.2 million during the year ended December 31,
        2001. The increase in long-term debt for MGI, Lakepointe Assets and
        Other between 2000 and 2001 was due primarily to borrowings made in
        connection with the purchase of the Lake Pointe Plaza complex. The
        decrease in MGHI Parent's long-term debt between December 31, 2000 and
        December 31, 2001, and the repayments reflected in 2001 and 2000 are the
        result of repurchases of debt. In addition, Scotia LLC made principal
        payments on the Timber Notes of $15.9 million and $8.2 million during
        the years ended December 31, 2000 and 1999, respectively.
(2)     Proceeds from dispositions of property and investments include $19.8
        million in 2001 for Pacific Lumber's sale of a portion of the Grizzly
        Creek grove, $67.0 million in 2000 for Scotia LLC's sale of the Owl
        Creek grove, and $299.9 million in 1999 for Pacific Lumber's sale of the
        Headwaters Timberlands.
(3)     For the year ended December 31, 2001, $79.9 million of dividends were
        paid by Scotia LLC to Pacific Lumber, $63.9 million of which was made
        using proceeds from the sale of Scotia LLC's Owl Creek grove. In
        addition to the $79.9 million of dividends from Scotia LLC, Pacific
        Lumber received $9.3 million from MGI related to repayment of
        intercompany debt. For the year ended December 31, 2000, $90.0 million
        of the dividends paid from MGI to MGHI were made using proceeds from the
        sale of the Headwaters Timberlands. MGHI in turn paid a $45.0 million
        dividend to MAXXAM Parent.

      Subsequent to December 31, 2001, the Company repurchased $16.9 million of
the MGHI Notes, resulting in an extraordinary gain of $1.9 million (net of tax).
The Company expects that interest payments on the remaining $71.3 million of
MGHI Notes will be paid with its existing cash and/or payments on the MAXXAM
Note.

      The Company owns 27,938,250 shares of the common stock of Kaiser,
representing a 34.6% interest. As a result of Kaiser filing for bankruptcy on
February 12, 2002, the value of Kaiser common stock has declined since December
31, 2001, and the market value of the Kaiser shares owned by the Company based
on the price per share quoted at the close of business on April 10, 2002, was
$3.9 million. There can be no assurance that such value would be realized should
the Company dispose of its investment in these shares, and it is possible that
all or a portion of the Company's interest may be diluted or cancelled as a part
of a plan of reorganization.

      Substantially all of the Company's consolidated assets are owned by
Pacific Lumber, and a significant portion of Pacific Lumber's consolidated
assets are owned by Scotia LLC. The holders of the Timber Notes have priority
over the claims of creditors of Pacific Lumber with respect to the assets and
cash flows of Scotia LLC. In the event Scotia LLC's cash flows are not
sufficient to generate distributable funds to Pacific Lumber, Pacific Lumber
could effectively be precluded from distributing funds to MGI and MGI in turn to
MGHI Parent.

      On August 14, 2001, Pacific Lumber's revolving credit agreement (the
"PACIFIC LUMBER CREDIT AGREEMENT") was renewed. The new facility provides for up
to a $50.0 million two-year revolving line of credit as compared to a $60.0
million line of credit under the expired facility. On each anniversary date
(subject to the consent of the lender), the Pacific Lumber Credit Agreement may
be extended by one year. Borrowings are secured by all of Pacific Lumber's
domestic accounts receivable and inventory.  Borrowings, letters of credit and
unused availability at December 31, 2001 are reflected in the table above.

      Scotia LLC has an agreement with a group of banks which allows it to
borrow up to one year's interest on the Timber Notes (the "SCOTIA LLC LINE OF
CREDIT"). On June 1, 2001, this facility was extended for an additional year
to July 12, 2002. At December 31, 2001, Scotia LLC could have borrowed a maximum
of $60.9 million under the Line of Credit, and there were no borrowings
outstanding under the Line of Credit. Annually, Scotia LLC will request that the
Scotia LLC Line of Credit be extended for a period of not less than 364 days. If
not extended, Scotia LLC may draw upon the full amount available. The amount
drawn would be repayable in 12 semiannual installments on each note payment date
(after the payment of certain other items, including the Aggregate Minimum
Principal Amortization Amount, as defined, then due), commencing approximately
two and one-half years following the date of the draw.

      On March 5, 2002, Scotia LLC notified the trustee for the Timber Notes
that it had met all of the requirements of the SAR Reduction Date, as defined in
the Indenture. Accordingly, on March 20, 2002, Scotia LLC released $29.4 million
from the SAR Account and distributed this amount to Pacific Lumber.

      During the year ended December 31, 2001, Scotia LLC used $67.3 million set
aside in the note payment account to pay the $57.4 million of interest due as
well as $9.9 million of principal. Scotia LLC repaid an additional $4.3 million
of principal on the Timber Notes using funds held in the SAR Account, resulting
in total principal payments of $14.2 million, an amount equal to Scheduled
Amortization. In addition, Scotia LLC made distributions in the amount of $79.9
million to its parent, Pacific Lumber, $63.9 million of which was made using
funds from the December 2000 sale of the Owl Creek grove and $14.5 million of
which was made using excess funds released from the SAR Account.

      On the note payment date in January 2002, Scotia LLC had $33.9 million set
aside in the note payment account to pay the $28.4 million of interest due as
well as $5.5 million of principal. Scotia LLC repaid an additional $6.1 million
of principal on the Timber Notes using funds held in the SAR Account, resulting
in a total principal payment of $11.6 million, an amount equal to Scheduled
Amortization (as defined in the Indenture).

      With respect to the note payment due in July 2002, Scotia LLC expects that
it will require funds from the Scotia LLC Line of Credit to pay a portion of the
interest due and that all of the funds used to pay the Scheduled Amortization
amount will be provided from the SAR Account.

      In June 2001, Lakepointe Assets purchased Lake Pointe Plaza, an office
complex located in Sugarland, Texas, for a purchase price of $131.3 million. The
transaction was financed with proceeds of $117.3 million, net of $5.2 million in
deferred financing costs, from the Lakepointe Notes ($122.5 million principal
amount with a final maturity date of June 8, 2021, and an interest rate of
7.56%), and with a cash payment of $14.0 million. Lakepointe Assets acquired the
property subject to two leases to existing tenants while simultaneously leasing
a majority of the premises, representing all of the remaining space, to an
affiliate of the seller. The office complex is fully leased for a period of 20
years under these three leases.

      Other capital expenditures were made during the past three years to
improve production efficiency, reduce operating costs and acquire additional
timberlands. Capital expenditures, excluding expenditures for timberlands and
real estate, are estimated to be between $8.0 million and $9.0 million per year
for the 2003 - 2005 period. Pacific Lumber and Scotia LLC may purchase
additional timberlands from time to time as appropriate opportunities arise.

      MGHI Parent believes that its existing resources will be sufficient to
fund its debt service and working capital requirements for the next year. With
respect to its long-term liquidity, MGHI Parent believes that its existing cash
and cash resources, together with payments by MAXXAM on the MAXXAM Note, should
be sufficient to meet its debt service and working capital requirements,
although there can be no assurance that this will be the case. MGHI Parent
expects MAXXAM to pay the amount of the MAXXAM Note necessary to retire the MGHI
Notes which are due in 2003. The regulatory and environmental matters described
under "--Background" above have adversely affected cash available from
subsidiaries and therefore the distributions to MGHI Parent. Distributions from
subsidiaries may continue to be minimal, if any, over the next one to two years.

      Due to its highly leveraged condition, MGI is more sensitive than less
leveraged companies to factors affecting its operations, including governmental
regulation and litigation affecting its timber harvesting practices (see
"--Background" above and Note 12 to the Consolidated Financial Statements),
increased competition from other lumber producers or alternative building
products and general economic conditions.

      Pacific Lumber's 2001 cash flows from operations were adversely affected
by operating inefficiencies, lower lumber prices, an inadequate supply of logs
and a related slowdown in lumber production. During 2001, comprehensive external
and internal reviews were conducted of Pacific Lumber's business operations.
These reviews were an effort to identify ways in which Pacific Lumber could
operate on a more efficient and cost effective basis. Based upon the results of
these reviews, Pacific Lumber has, among other things, indefinitely curtailed
two of its four operating sawmills, eliminated certain of its operations,
including its soil amendment and concrete block manufacturing operations, begun
utilizing more efficient harvesting methods and adopted certain other cost
saving measures. Most of these operational changes were implemented by Pacific
Lumber during the last quarter of 2001, or during the first quarter of 2002.
Pacific Lumber also terminated its internal logging operations as of April 1,
2002, and intends to rely on third party contract loggers to conduct these
activities. The adverse resulting impact on liquidity of its poor operating
results was offset by $79.9 million in distributions made by Scotia LLC to
Pacific Lumber (principally from the sale of the Owl Creek grove), $9.3 million
in repayments on an intercompany loan by MGI, and $18.5 million of proceeds
received from the sale of a portion of the Grizzly Creek grove. The $29.4
million release from the SAR Account discussed above will also improve Pacific
Lumber's liquidity. However, Pacific Lumber may require funds available under
the Pacific Lumber Credit Agreement, additional repayments by MGI of an
intercompany loan and/or capital contributions from MGI to enable it to meet its
working capital and capital expenditure requirements for the next year.

      With respect to long-term liquidity, although MGI and its subsidiaries
expect that their existing cash and cash equivalents, lines of credit and
ability to generate cash flows from operations should provide sufficient funds
to meet their debt service, working capital and capital expenditure
requirements, until such time as Pacific Lumber has adequate cash flows from
operations and/or dividends from Scotia LLC, there can be no assurance that
this will be the case.

CRITICAL ACCOUNTING POLICIES

      This section contains statements which constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. See Item 1. "Business--General" and below for cautionary information
with respect to such forward-looking statements.

      The discussion and analysis of the Company's financial condition and
results of operations is based upon the Company's consolidated financial
statements, which have been prepared in accordance with generally accepted
accounting principles. The preparation of these consolidated financial
statements requires the Company to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosures of contingent assets and liabilities. Estimates are based on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances. The result of this process forms the basis
for making judgments about the carrying value of assets and liabilities that are
not readily apparent from other sources. The Company reevaluates its estimates
and judgments on a regular, ongoing basis. Actual results may differ from these
estimates under different assumptions and conditions.

      The following accounting policies are considered critical in light of the
potentially material impact that the estimates, judgments and uncertainties
affecting the application of these policies might have on the Company's reported
financial information.

      Loss Contingencies
      The Company is involved in various claims, lawsuits and other proceedings
discussed in Note 12 to the financial statements. Such litigation involves
uncertainty as to possible losses to the Company that will ultimately be
realized when one or more future events occur or fail to occur. The Company
accrues and charges to income estimated losses from contingencies when it is
probable (at the balance sheet date) that an asset has been impaired or
liability incurred and the amount of loss can be reasonably estimated.
Differences between estimates recorded and actual amounts determined in
subsequent periods are treated as changes in accounting estimates (i.e., they
are reflected in the financial statements in the period in which they are
determined to be losses, with no retroactive restatement).

      The Company estimates the probability of losses on legal contingencies
based on the advice of internal and external counsel, the outcomes from similar
litigation, the status of lawsuits (including settlement initiatives),
legislative developments, and other factors. Risks and uncertainties are
inherent with respect to the ultimate outcome of litigation.

      Impairment of Noncurrent Assets
      The Company recorded charges of $2.2 million in 2001 to write-down the
carrying amount of certain mills, machinery and equipment to estimated fair
value (see Note 2 to the Consolidated Financial Statements). The Company reviews
noncurrent assets for impairment when circumstances indicate that the carrying
amount of such assets may not be recoverable. Impairment is indicated if the
expected total undiscounted future cash flows are less than the carrying amount
of the assets. Assets are written down to fair value and a loss is recognized
upon impairment. Fair value increases on assets previously written down for
impairment losses are not recognized.

      Considerable judgment is exercised in the Company's assessment of the need
for an impairment write-down. Indicators of impairment must be present. In some
instances, situations might exist where impairments are the result of changes in
economic conditions or other factors that develop over time.

      Deferred Tax Asset Valuation Allowances
      As of December 31, 2001, the Company had $13.9 million of net deferred tax
liabilities. The deferred tax assets and liabilities reported in the Company's
balance sheet reflect the amount of taxes that the Company has prepaid or
received a tax benefit for (an asset) or will have to pay in the future (a
liability) because of temporary differences that result from differences in
timing of revenue recognition or expense deductibility between generally
accepted accounting principles and the Internal Revenue Code. Accounting rules
require that a deferred tax asset be reduced by a valuation allowance if, based
on the weight of available evidence, it is more likely than not (a likelihood of
more than 50%) that some portion or all of the deferred tax asset will not be
realized. The Company considers all available evidence, both positive and
negative, to determine whether a valuation allowance is needed. The need for a
valuation allowance ultimately depends on the existence of sufficient taxable
income necessary to receive the benefit of a future deductible amount.

      Assessing the need for and amount of a valuation allowance for deferred
tax assets requires significant judgment. The fact that a benefit may be
expected for a portion but not all of a deferred tax asset increases the
judgmental complexity. Projections of future taxable income, by their very
nature, require estimates and judgments about future events that, although they
might be predictable, are far less certain than events that have already
occurred and can be objectively measured.

      Uncertainties that might exist with respect to the realization of the
Company's deferred tax assets relate to future taxable income. See Note 9 to the
Consolidated Financial Statements for further discussion of the Company's
valuation allowances on deferred tax assets.

NEW ACCOUNTING PRONOUNCEMENTS

      See Note 1 to the Consolidated Financial Statements for a discussion of
new accounting pronouncements and their potential impact on the Company.


ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      This item is not applicable for the Company and its subsidiaries; however,
Kaiser, the Company's equity investee, utilizes hedging transactions to lock-in
a specified price or range of prices for certain products which it sells or
consumes and to mitigate its exposure to changes in foreign currency exchange
rates. See Item 7A. "Quantitative and Qualitative Disclosures About Market Risk"
from Kaiser's Annual Report on Form 10-K (included as Exhibit 99.4 hereto) for
information regarding Kaiser's hedging activities.


ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To MAXXAM Group Holdings Inc.:

      We have audited the accompanying consolidated balance sheets of MAXXAM
Group Holdings Inc. (a Delaware corporation and a wholly owned subsidiary of
MAXXAM Inc.) and subsidiaries as of December 31, 2001 and 2000, and the related
consolidated statements of operations, stockholder's deficit and cash flows for
each of the three years in the period ended December 31, 2001. These financial
statements and the schedule referred to below are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.

      We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

      In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of MAXXAM Group
Holdings Inc. and subsidiaries as of December 31, 2001 and 2000, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States.

      Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in Item
14(a)(2) of this Form 10-K is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in our audits of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.

                                                          ARTHUR ANDERSEN LLP


San Francisco, California
March 28, 2002


                   MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEET
               (IN MILLIONS OF DOLLARS, EXCEPT SHARE INFORMATION)


                                                                                                 DECEMBER 31,
                                                                                            -----------------------
                                                                                               2001        2000
                                                                                            ----------  -----------
ASSETS:

Current assets:
   Cash, cash equivalents and restricted cash.............................................  $    66.0   $    201.7
   Marketable securities..................................................................       53.6         28.9
   Receivables:
      Trade...............................................................................       12.5         10.4
      Receivables from MAXXAM Inc.........................................................        8.5          6.6
      Other...............................................................................        2.1          4.0
   Inventories............................................................................       51.4         55.1
   Prepaid expenses and other current assets..............................................       17.5         14.2
                                                                                            ----------  -----------
        Total current assets..............................................................      211.6        320.9
Property, plant and equipment, net of accumulated depreciation of $100.1 and
   $102.9, respectively...................................................................      224.9        100.0
Timber and timberlands, net of accumulated depletion of $193.7 and $183.8,
   respectively...........................................................................      235.0        244.3
Note receivable from MAXXAM...............................................................      183.1        164.5
Investment in Kaiser......................................................................          -         27.6
Deferred financing costs, net.............................................................       22.8         19.8
Deferred income taxes.....................................................................       13.4         27.3
Restricted cash, marketable securities and other investments..............................       89.8         96.6
Other assets..............................................................................        6.8          7.9
                                                                                            ----------  -----------
                                                                                            $   987.4   $  1,008.9
                                                                                            ==========  ===========

LIABILITIES AND STOCKHOLDER'S DEFICIT:

Current liabilities:
   Accounts payable.......................................................................  $     5.7   $      6.2
   Accrued interest.......................................................................       30.5         32.4
   Accrued compensation and related benefits..............................................       12.4          8.2
   Deferred income taxes..................................................................        6.8         10.0
   Other accrued liabilities..............................................................        8.0          3.6
   Short-term borrowings and current maturities of long-term debt, excluding $2.3 and
      $2.2, respectively, of repurchased Timber Notes held in the SAR Account.............       35.5         51.3
                                                                                            ----------  -----------
        Total current liabilities.........................................................       98.9        111.7
Long-term debt, less current maturities and excluding $55.4 and $57.7, respectively, of
   repurchased Timber Notes held in the SAR Account.......................................      962.7        888.8
Deferred income taxes.....................................................................       19.5         31.2
Other noncurrent liabilities..............................................................       28.3         26.6
                                                                                            ----------  -----------
        Total liabilities.................................................................    1,109.4      1,058.3
                                                                                            ----------  -----------

Contingencies (See Note 12)

Stockholder's deficit:
   Common stock, $1.00 par value; 3,000 shares authorized; 1,000 shares issued............          -            -
   Additional capital.....................................................................      123.2        123.2
   Accumulated deficit....................................................................     (245.5)      (172.6)
   Accumulated other comprehensive income.................................................        0.3            -
                                                                                            ----------  -----------
        Total stockholder's deficit.......................................................     (122.0)       (49.4)
                                                                                            ----------  -----------
                                                                                            $   987.4   $  1,008.9
                                                                                            ==========  ===========
   The accompanying notes are an integral part of these financial statements.



                   MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF OPERATIONS
                            (IN MILLIONS OF DOLLARS)

                                                                                     YEARS ENDED DECEMBER 31,
                                                                                -----------------------------------
                                                                                   2001        2000        1999
                                                                                ----------  ----------  -----------
Net sales:
   Lumber and logs............................................................  $   162.8   $   178.8   $    165.5
   Other......................................................................       26.9        21.3         22.3
                                                                                ----------  ----------  -----------
                                                                                    189.7       200.1        187.8
                                                                                ----------  ----------  -----------

Operating expenses:
   Cost of goods sold.........................................................      164.3       157.4        159.5
   Selling, general and administrative expenses...............................       21.7        15.7         15.7
   Special charges............................................................        8.2          -             -
   Depletion and depreciation.................................................       22.0        19.7         17.0
                                                                                ----------  ----------  -----------
                                                                                    216.2       192.8        192.2
                                                                                ----------  ----------  -----------

Operating income (loss).......................................................      (26.5)        7.3         (4.4)

Other income (expense):
   Gains on sales of timberlands..............................................       16.7        60.0        239.8
   Equity in earnings (loss) of Kaiser........................................      (27.6)        5.9        (19.2)
   Investment, interest and other income (expense), net.......................       33.5        45.6         44.5
   Interest expense...........................................................      (77.0)      (79.5)       (82.8)
                                                                                ----------  ----------  -----------
Income (loss) before income taxes.............................................      (80.9)       39.3        177.9
Benefit (provision) in lieu of income taxes...................................        4.4       (13.4)       (77.9)
                                                                                ----------  ----------  -----------

Income (loss) before extraordinary items......................................      (76.5)       25.9        100.0
Extraordinary items:
   Gains on repurchases of debt, net of provision in lieu of income
      taxes of $2.0 and $2.4, respectively....................................        3.6         4.2            -
                                                                                ----------  ----------  -----------
Net income (loss).............................................................  $   (72.9)  $    30.1   $    100.0
                                                                                ==========  ==========  ===========

   The accompanying notes are an integral part of these financial statements.





                   MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENT OF STOCKHOLDER'S DEFICIT
              (IN MILLION OF DOLLARS, EXCEPT PER SHARE INFORMATION)



                                                                                   ACCUMU-
                                                                                    LATED
                                                                                     OTHER
                                                                                   COMPRE-                 COMPRE-
                                                  COMMON      ADDI-     ACCUM-     HENSIVE                 HENSIVE
                                                   STOCK     TIONAL     ULATED      INCOME                 INCOME
                                                ($1.00 PAR)  CAPITAL    DEFICIT     (LOSS)      TOTAL      (LOSS)
                                                ---------- ----------  ---------  ----------  ---------  ----------
Balance, December 31, 1998....................  $       -  $   123.2   $ (257.7)  $       -   $ (134.5)
   Net income.................................          -          -      100.0           -      100.0   $   100.0
   Equity in Kaiser Aluminum
      Corporation's additional minimum
      pension liability.......................          -          -          -        (0.4)      (0.4)       (0.4)
                                                                                                         ----------
   Comprehensive income.......................                                                           $    99.6
                                                ---------- ----------  ---------  ----------  ---------  ==========
Balance, December 31, 1999....................          -      123.2     (157.7)       (0.4)     (34.9)
   Net income.................................          -          -       30.1           -       30.1   $    30.1
   Equity in Kaiser Aluminum
      Corporation's additional minimum
      pension liability.......................          -          -          -        (0.2)      (0.2)       (0.2)
   Change in value of available-for-sale
      investments.............................          -          -          -         0.6        0.6         0.6
                                                                                                         ----------
   Comprehensive income.......................                                                           $    30.5
                                                                                                         ==========
   Dividend...................................          -          -      (45.0)          -      (45.0)
                                                ---------- ----------  ---------  ----------  ---------
Balance, December 31, 2000....................          -      123.2     (172.6)          -      (49.4)
   Net loss...................................          -          -      (72.9)          -      (72.9)  $   (72.9)
   Change in value of available-for-sale
      investments.............................          -          -          -         0.3        0.3         0.3
                                                                                                         ----------
   Comprehensive loss.........................                                                           $   (72.6)
                                                ---------- ----------  ---------  ----------  ---------  ==========
Balance, December 31, 2001....................  $       -  $   123.2   $ (245.5)  $     0.3   $ (122.0)
                                                ========== ==========  =========  ==========  =========

   The accompanying notes are an integral part of these financial statements.






                   MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF CASH FLOWS
                            (IN MILLIONS OF DOLLARS)


                                                                                         YEARS ENDED DECEMBER 31,
                                                                                       ----------------------------
                                                                                         2001      2000      1999
                                                                                       --------- --------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income (loss).................................................................. $  (72.9)     30.1  $ 100.0
   Adjustments to reconcile net income (loss) to net cash provided by (used for)
      operating activities:
      Depletion and depreciation......................................................     22.0      19.7     17.0
      Non-cash special charges........................................................      7.6         -        -
      Gains on sales of timberlands...................................................    (16.7)    (60.0)  (239.8)
      Extraordinary gains on repurchases of debt......................................     (3.6)     (4.2)       -
      Equity in undistributed loss (earnings) of Kaiser...............................     27.6      (5.9)    19.2
      Amortization of deferred financing costs........................................      2.4       2.3      2.4
      Net gains on marketable securities..............................................     (2.1)    (15.1)   (11.5)
      Deferral of interest payment on note receivable from MAXXAM.....................    (18.6)    (16.7)   (15.0)
      other...........................................................................      7.0         -        -
   Increase (decrease) in cash resulting from changes in:
      Receivables.....................................................................     (1.5)     (1.5)    (2.8)
      Inventories, net of depletion...................................................      3.1     (12.2)    (2.1)
      Prepaid expenses and other assets...............................................     (2.3)     (3.3)    (2.8)
      Accounts payable................................................................     (0.7)      0.1      2.7
      Accrued interest................................................................     (1.9)     (2.1)    (0.3)
      Accrued and deferred income taxes...............................................     (5.7)     13.9     76.3
      Other liabilities...............................................................      1.3       0.1     (0.7)
      Long-term assets and long-term liabilities......................................      1.2       2.1     (2.1)
                                                                                       --------- --------- --------
        Net cash used for operating activities........................................    (53.8)    (52.7)   (59.5)
                                                                                       --------- --------- --------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Proceeds from dispositions of property and investments.............................     19.8      67.3    298.3
   Net sales (purchases) of marketable securities.....................................    (21.8)     30.5     (4.7)
   Capital expenditures...............................................................   (144.7)    (14.0)   (23.1)
   Restricted cash withdrawals used to acquire timberlands............................        -       0.8     12.9
                                                                                       --------- --------- --------
        Net cash provided by (used for) investing activities..........................   (146.7)     84.6    283.4
                                                                                       --------- --------- --------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from issuances of long-term debt..........................................    122.5          -       -
   Borrowings (repayments) under revolving credit agreements..........................    (18.7)     37.0        -
   Redemptions, repurchases of and principal payments on long-term debt...............    (40.2)    (21.8)   (13.1)
   Incurrence of deferred financing costs.............................................     (5.3)        -     (0.7)
   Restricted cash withdrawals (deposits), net........................................      6.5       9.8   (171.1)
   Dividends paid to stockholder......................................................        -     (45.0)       -
                                                                                       --------- --------- --------
        Net cash provided by (used for) financing activities..........................     64.8     (20.0)  (184.9)
                                                                                       --------- --------- --------

NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH.................   (135.7)     11.9     39.0
CASH, CASH EQUIVALENTS AND RESTRICTED CASH  AT BEGINNING OF YEAR......................    201.7     189.8    150.8
                                                                                       --------- --------- --------
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF YEAR............................. $   66.0  $  201.7  $ 189.8
                                                                                       ========= ========= ========


   The accompanying notes are an integral part of these financial statements.








                   MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.    BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

   BASIS OF PRESENTATION

      The consolidated financial statements include the accounts of MAXXAM Group
Holdings Inc. and its wholly owned subsidiaries. All references to the "COMPANY"
or "MGHI" include MAXXAM Group Holdings Inc. and its wholly owned subsidiaries,
unless otherwise indicated or the context indicates otherwise. MGHI is a wholly
owned subsidiary of MAXXAM Inc. ("MAXXAM"). Intercompany balances and
transactions have been eliminated.

      The Company's wholly owned subsidiary, MAXXAM Group Inc. ("MGI"), and its
wholly owned subsidiaries, The Pacific Lumber Company ("PACIFIC LUMBER") and
Britt Lumber Co., Inc. ("BRITT") are engaged in forest products operations.
Pacific Lumber's principal wholly owned subsidiaries are Scotia Pacific Company
LLC ("SCOTIA LLC") and Salmon Creek LLC ("SALMON CREEK"). Salmon Creek's wholly
owned subsidiary is Lakepointe Assets Holdings LLC ("LAKEPOINTE ASSETS"). MGI's
core business is in several principal aspects of the lumber industry - the
growing and harvesting of redwood and Douglas-fir timber, the milling of logs
into lumber and the manufacture of lumber into a variety of finished products.
Housing, construction and remodeling are the principal markets for the Company's
lumber products. In addition, MGI is engaged in commercial real estate ownership
and leasing through Lakepointe Assets.

      In addition, the Company has 27,938,250 shares of the common stock of
Kaiser Aluminum Corporation ("KAISER") which represented a 34.6% equity interest
in Kaiser at December 31, 2001.

      Liquidity and Cash Resources
      Pacific Lumber's 2001 cash flows from operations were adversely affected
by operating inefficiencies, lower lumber prices, an inadequate supply of logs
and a related slowdown in lumber production. During 2001, comprehensive external
and internal reviews were conducted of Pacific Lumber's business operations.
These reviews were an effort to identify ways in which Pacific Lumber could
operate on a more efficient and cost effective basis. Based upon the results of
these reviews, Pacific Lumber, among other things, indefinitely idled two of its
four sawmills, eliminated certain of its operations, including its soil
amendment and concrete block activities, has began utilizing more efficient
harvesting methods and adopted certain other cost saving measures. Most of these
changes were implemented by Pacific Lumber in the last quarter of 2001, or the
first quarter of 2002. Pacific Lumber also ended its internal logging operations
as of April 1, 2002, and intends to rely exclusively on third party contract
loggers to conduct these activities in the future. The adverse impact on
liquidity of its poor operating results was offset by $79.9 million in
distributions made by Scotia LLC to Pacific Lumber (principally from the sale of
the Owl Creek grove), $9.3 million in repayments on an intercompany loan by MGI,
and $18.5 million of proceeds received from the sale of a portion of the Grizzly
Creek grove. The $29.4 million release from the SAR Account discussed in Note 4
will also improve Pacific Lumber's liquidity. However, Pacific Lumber may
require funds available under the Pacific Lumber Credit Agreement, additional
repayments by MGI of an intercompany loan and/or capital contributions from MGI
to enable it to meet its working capital and capital expenditure requirements
for the next year.

      With respect to long-term liquidity, although the Company and its
subsidiaries expect that their existing cash and cash equivalents, lines of
credit and ability to generate cash flows from operations should provide
sufficient funds to meet their debt service and working capital requirements,
until such time as Pacific Lumber has adequate cash flows from operations and/or
dividends from Scotia LLC, there can be no assurance that this will be the case.

   USE OF ESTIMATES AND ASSUMPTIONS

      The preparation of financial statements in accordance with generally accepted
accounting principles requires the use of estimates and assumptions that affect
(i) the reported amounts of assets and liabilities, (ii) the disclosure of
contingent assets and liabilities known to exist as of the date the financial
statements are published and (iii) the reported amount of revenues and expenses
recognized during each period presented. The Company reviews all significant
estimates affecting its consolidated financial statements on a recurring basis
and records the effect of any necessary adjustments prior to filing the
consolidated financial statements with the Securities and Exchange Commission.
Adjustments made using estimates often relate to improved information not
previously available. Uncertainties regarding such estimates and assumptions are
inherent in the preparation of the Company's consolidated financial statements;
accordingly, actual results could differ from estimates, and it is possible that
the subsequent resolution of any one of the contingent matters described in Note
12 could differ materially from current estimates. The results of an adverse
resolution of such uncertainties could have a material effect on the Company's
consolidated financial position, results of operations or liquidity.

   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      Prepaid Expenses and Other Current Assets; Other Long-term Assets
      Direct costs associated with the preparation of timber harvesting plans
("THPS") are capitalized and reflected in prepaid expenses and other current
assets on the balance sheet. These costs are expensed as the timber covered by
the related THP is harvested. Costs associated with the preparation of a
sustained yield plan ("SYP") and a multi-species habitat conservation plan
("HCP") are capitalized and reflected in other long-term assets. These costs are
being amortized over 10 years.

      Timber and Timberlands
      Timber and timberlands are stated at cost, net of accumulated depletion.
Depletion is computed utilizing the unit-of-production method based upon
estimates of timber quantities. Periodically, the Company will reassess its
depletion rates considering currently estimated merchantable timber and will
adjust depletion rates prospectively.

      Concentrations of Credit Risk
      Cash equivalents and restricted marketable securities are invested
primarily in investment grade debt instruments as well as other types of
corporate and government debt obligations. The Company mitigates its
concentration of credit risk with respect to these investments by generally
purchasing high grade investments (ratings of A1/P1 short-term or at least AA/aa
long-term debt). No more than 10% is invested in the same issue. Unrestricted
marketable securities are invested in debt securities, corporate common stocks
and option contracts. These investments are held in a limited partnership
interest managed by a financial institution.

      The Company had three customers which accounted for 15%, 3% and 3%,
respectively, of total net lumber sales for the year ended December 31, 2001.
Trade receivables from these customers totaled $1.3 million as of December 31,
2001.

      Revenue Recognition
      Revenues from the sale of logs, lumber products and by-products are
recorded when the legal ownership and the risk of loss passes to the buyer,
which is generally at the time of shipment. Rental revenue on operating leases
is recognized on a straight-line basis over the term of the lease.

      Deferred Financing Costs
      Costs incurred to obtain debt financing are deferred and amortized over
the estimated term of the related borrowing. The amortization of deferred
financing costs expense is included in interest expense on the income statement.

      Accounting Pronouncements for Derivative Financial Instruments - Kaiser
      Effective January 1, 2001, Kaiser began reporting derivative activities
pursuant to Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Financial Instruments and Hedging Activities" ("SFAS NO. 133"), which
requires companies to recognize all derivative instruments as assets or
liabilities in the balance sheet and to measure those instruments at fair value.
Kaiser, the Company's equity investee, utilizes derivative financial instruments
primarily to mitigate its exposure to changes in prices for certain of the
products which Kaiser sells and consumes and, to a lesser extent, to mitigate
its exposure to changes in foreign currency exchange rates. Changes in the
market value of Kaiser's derivative instruments represent unrealized gains or
losses. Such unrealized gains or losses will fluctuate, based on prevailing
market prices at each subsequent balance sheet date, until the transaction
occurs. Under SFAS No. 133, these changes are recorded as an increase or
reduction in stockholders' equity through either other comprehensive income or
net income, depending on the facts and circumstances with respect to the hedge
and its documentation. To the extent that changes in the market values of
Kaiser's hedging positions are initially recorded in other comprehensive income,
such changes are reversed from other comprehensive income (offset by any
fluctuations in other "open" positions) and are recorded in net income upon the
occurrence of the transactions to which the hedges relate. Under the equity
method of accounting which the Company follows in accounting for its investment
in Kaiser, the Company will reflect its equity share of Kaiser's adjustments
through either other comprehensive income or net income, as appropriate.

      SFAS No. 133 requires that, as of the date of initial adoption, the
difference between the market value of derivative instruments and the previous
carrying amount of those derivatives recorded on Kaiser's consolidated balance
sheet be reported in net income or other comprehensive income, as appropriate,
as the cumulative effect of a change in accounting principle. As previously
discussed, this impact was reflected in Kaiser's first quarter 2001 financial
statements, and in turn the Company's equity share of the impact was recorded in
its first quarter 2001 financial statements. Because the losses in 2001
attributable to Kaiser reduced the Company's investment to zero, no additional
amounts relating to Kaiser's derivative activities were recorded by the Company
in 2001.

      Investment in Kaiser
      The Company's investment in Kaiser consists of a 34.6% equity interest at
December 31, 2001. As of December 31, 2001, the Company's investment in Kaiser
was accounted for under the equity method. On February 12, 2002, Kaiser filed a
voluntary petition under Chapter 11 of the United States Bankruptcy Code. As a
result of such filing, the Company will account for its investment in Kaiser
under the cost method beginning in the first quarter of 2002. See Notes 2 and 7
for further discussion of the Company's investment in Kaiser.

      NEW ACCOUNTING STANDARDS
      In June 2001, the Financial Accounting Standards Board issued SFAS No.
143, "Accounting for Asset Retirement Obligations" ("SFAS NO. 143") which
addresses accounting and reporting standards for obligations associated with the
retirement of tangible long-lived assets and the related asset retirement costs.
The Company is required to adopt SFAS No. 143 beginning on January 1, 2003. In
general, SFAS No. 143 requires the recognition of a liability resulting from
anticipated asset retirement obligations, offset by an increase in the value of
the associated productive asset for such anticipated costs. Over the life of the
asset, depreciation expense is to include the ratable expensing of the
retirement cost included with the asset value. The statement applies to all
legal obligations associated with the retirement of a tangible long-lived asset
that results from the acquisition, construction, or development and (or) the
normal operation of a long-lived asset, except for certain lease obligations.
Excluded from this statement are obligations arising solely from a plan to
dispose of a long-lived asset and obligations that result from the improper
operation of an asset (e.g. environmental obligations). The Company is
continuing its evaluation of SFAS No. 143. However, the Company does not
currently expect the adoption of SFAS No. 143 to have a material impact on its
future financial statements.

      In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS NO.
144"), which sets forth new guidance for accounting and reporting for impairment
or disposal of long-lived assets. The provisions of SFAS 144 are effective for
the Company beginning on January 1, 2002. Based on presently available
estimates, the new impairment and disposal rules are not expected to result in
the recognition of material impairment losses in 2002 beyond those reported as
of December 31, 2001 (see Note 2). In addition to the new guidance on
impairments, SFAS No. 144 broadens the applicability of the provisions of
Accounting Principles Board Opinion 30 for the presentation of discontinued
operations in the income statement to include a component of an entity (rather
than a segment of a business). A component of an entity comprises operations and
cash flows that can be clearly distinguished, operationally and for financial
reporting purposes, from the rest of the entity. A component of an entity that
is classified as held for sale or that has been disposed of is presented as a
discontinued operation if the operations and cash flows of the component will be
(or have been) eliminated from the ongoing operations of the entity and the
entity will not have any significant continuing involvement in the operations of
the component. Although this provision will not affect the total amount reported
for net income, it is expected to result in certain operations which were
disposed of in prior years being reported separately from results from
continuing operations.

2.    SEGMENT INFORMATION AND SPECIAL CHARGES

      As a result of the acquisition of certain real estate in June 2001 which
is described in Note 3 below, and beginning with the second quarter 2001
financial statements, the Company's financial results are reported in two
business segments: forest products and real estate. The column corporate and
other includes the results of the parent company and the investment in Kaiser,
and also serves to reconcile the total of the reportable segments' amounts to
the total in the Company's consolidated financial statements. The following
table presents such financial information, consistent with the manner in which
management reviews and evaluates the Company's business activities (in
millions).



                                                            FOREST       REAL     Corporate    CONSOLIDATED
                                             DECEMBER 31,  PRODUCTS     ESTATE    AND OTHER        TOTAL
                                             ------------ -----------  --------- ------------ --------------
Net sales                                        2001     $    185.3   $    4.4  $         -         $189.7
                                                 2000          200.1          -            -          200.1
                                                 1999          187.8          -            -          187.8

Operating income (loss)                          2001          (27.5)       1.6         (0.6)         (26.5)
                                                 2000            7.6          -         (0.3)           7.3
                                                 1999           (4.1)         -         (0.3)          (4.4)

Investment, interest and
   other income (expense), net                   2001           11.3          -         22.2           33.5
                                                 2000           20.5          -         25.1           45.6
                                                 1999           26.9          -         17.6           44.5

Interest expense                                 2001           60.1        4.9         12.0           77.0
                                                 2000           64.2          -         15.3           79.5
                                                 1999           66.5          -         16.3           82.8

Depletion and depreciation                       2001           19.4        2.6            -           22.0
                                                 2000           19.7          -            -           19.7
                                                 1999           17.0          -            -           17.0

Income (loss) before income taxes                2001          (59.6)      (3.3)       (18.0)         (80.9)
                                                 2000           23.9          -         15.4           39.3
                                                 1999          196.1          -        (18.2)         177.9

Capital expenditures                             2001           13.4      131.3            -          144.7
                                                 2000           14.0          -            -           14.0
                                                 1999           23.1          -            -           23.1

Investment in Kaiser                             2001              -          -            -              -
                                                 2000              -          -         27.6           27.6

Total assets                                     2001          610.8      133.7        242.9          987.4
                                                 2000          726.2          -        282.7        1,008.9

   SPECIAL CHARGES

      The strategic reviews of the Company's operations discussed in Note 1
resulted in impairment charges, restructuring charges and accruals for
environmental remediation costs.

      In connection with the idling of two of the Company's sawmills, the
Company recorded a charge to operating costs of $0.8 million to write-down the
carrying amount of the mills to estimated fair value. As of December 31, 2001,
the Company has not committed to a plan to dispose of the buildings. In
addition, the Company identified machinery and equipment with a carrying amount
of $2.0 million that it no longer needed for its current or future operations
and committed to a plan in 2001 to dispose of it during 2002. The appraised fair
value of the machinery and equipment, net of related costs to sell, is $0.6
million. Accordingly, the Company recorded an impairment charge to operating
costs of $1.4 million in 2001 for assets to be disposed of.

      A $2.6 million restructuring charge was recorded in 2001 reflecting cash
termination benefits associated with the separation of approximately 305
employees as part of an involuntary termination plan. As of December 31, 2001,
168 of the affected employees had left the Company. The remainder are expected
to leave by the second quarter of 2002. Cash termination benefits of $0.6
million were paid in the fourth quarter of 2001, and are included in operating
costs. The remaining balance of $2.0 million is expected to be paid by the
second quarter of 2002.

      In addition, the Company recorded an environmental remediation charge of $3.4
million in 2001. The environmental accrual represents the Company's estimate of
costs reasonably expected to be incurred based on presently enacted laws and
regulations, currently available facts, existing technology, and the Company's
assessment of the likely remediation actions to be taken. The Company expects
that $0.7 million of this remediation liability will be incurred during 2002.
Based on management's best estimates given the current facts and circumstances,
the remaining $2.7 million is expected to be incurred from 2003 through 2005.

      Other unusual items include pre-tax gains on the sale of a portion of the
Grizzly Creek grove of $16.7 million in November 2001, $60.0 million on the sale
of the Owl Creek grove in December 2000, and $239.8 million on the sale of the
Headwaters Timberlands in March 1999. See Note 3.

      On February 12, 2002, Kaiser filed a voluntary petition for reorganization
under Chapter 11 of the United States Federal Bankruptcy Code in the United
States Bankruptcy Court for the District of Delaware. As a result of such
filing, the Company will account for its investment in Kaiser under the cost
method beginning in the first quarter of 2002 with no further recognition of
equity in earnings or losses until such time as the shares are disposed of or a
plan of reorganization is implemented. See Note 7 for further information,
including summarized financial information of Kaiser.

3.    SIGNIFICANT ACQUISITIONS AND DISPOSITIONS

      LakePointe Plaza
      In June 2001, Lakepointe Assets purchased Lake Pointe Plaza, an office
complex located in Sugar Land, Texas, for a purchase price of $131.3 million.
The transaction was financed with proceeds of $117.3 million, net of $5.2
million in deferred financing costs, from the "LAKEPOINTE NOTES" ($122.5 million
principal amount with a final maturity date of June 8, 2021, and an interest
rate of 7.56%), and with a cash payment of $14.0 million. Lakepointe Assets
acquired the property subject to two leases to existing tenants while
simultaneously leasing a majority of the premises, representing all of the
remaining space, to an affiliate of the seller. The office complex is fully
leased for a period of 20 years under these three leases. Lakepointe Assets is
accounting for these leases as operating leases. The Lakepointe Notes are
secured by the leases, Lake Pointe Plaza and a $60.0 million residual value
insurance contract.

      Headwaters Transactions
      In March 1999, the United States and California acquired approximately
5,600 acres of timberlands containing a significant amount of virgin old growth
timber, from Salmon Creek and Pacific Lumber (the "HEADWATERS TIMBERLANDS").
Salmon Creek received $299.9 million for its 4,900 acres, and for its 700 acres
Pacific Lumber received the 7,700 acre Elk River Timberlands, which Pacific
Lumber contributed to Scotia LLC in June 1999. See Note 12 below for a
discussion of additional arrangements entered into at that time.

      As a result of the disposition of the Headwaters Timberlands, the Company
recognized a pre-tax gain of $239.8 million ($142.1 million net of deferred
taxes) in 1999. This amount represents the gain attributable to the portion of
the Headwaters Timberlands for which the Company received $299.9 million in
cash. With respect to the remaining portion of the Headwaters Timberlands for
which the Company received the Elk River Timberlands, no gain has been
recognized as this represented an exchange of substantially similar productive
assets. These timberlands have been reflected in the Company's financial
statements at an amount which represents the Company's historical cost for the
timberlands which were transferred to the United States.

      Scotia LLC and Pacific Lumber also entered into agreements with California
for the sale of two timber properties known as the Owl Creek grove and the
Grizzly Creek grove. On December 29, 2000, Scotia LLC sold the Owl Creek grove
to California for $67.0 million, resulting in a pre-tax gain of $60.0 million.
On November 15, 2001, Pacific Lumber sold a portion of the Grizzly Creek grove
to California for $19.8 million, resulting in a pre-tax gain of $16.7 million.

4.    CASH, MARKETABLE SECURITIES AND OTHER INVESTMENTS

      Cash equivalents consist of highly liquid money market instruments with
original maturities of three months or less. As of December 31, 2001 and 2000,
the carrying amounts approximated fair value.

      Marketable securities consist primarily of investments in debt securities.
The Company determines the appropriate classification of its investments in debt
securities at the time of purchase and reevaluates such determinations at each
balance sheet date. Debt securities are classified as "held-to-maturity" when
the Company has the positive intent and ability to hold the securities to
maturity. Debt securities which the Company does not have the intent or ability
to hold to maturity are classified as "available-for- sale." "Held-to-maturity"
securities are stated at amortized cost. Debt securities classified as
"held-to-maturity" as of December 31, 2001 and 2000, totaled $11.9 million and
$18.9 million, respectively, and had a fair market value of $11.9 million and
$18.9 million, respectively. "Available-for-sale" securities are carried at fair
market value, with the unrealized gains and losses included in other
comprehensive income and reported in stockholder's deficit. The fair value of
substantially all securities is determined by quoted market prices. Marketable
securities which are considered "trading" securities consist of long and short
positions in corporate common stocks and option contracts and are carried at
fair value. The cost of the securities sold is determined using the first-in,
first-out method. Included in investment, interest and other income (expense),
net for each of the three years in the period ended December 31, 2001 were: 2001
- net realized losses of $0.5 million and net unrealized gains of $3.3 million;
2000 - net realized gains of $13.7 million and net unrealized gains of $0.4
million; 1999 - net realized gains of $12.5 million and net unrealized losses of
$0.9 million.

      Cash, marketable securities and other investments include the following
amounts which are restricted (in millions):


                                                                                               December 31,
                                                                                       ----------------------------
                                                                                           2001           2000
                                                                                       ------------- --------------
Current assets:
   Cash and cash equivalents:
      Amounts held as security for short positions in marketable securities..........  $          -  $         9.2
      Other restricted cash and cash equivalents.....................................          35.4           29.2
                                                                                       ------------- --------------
                                                                                               35.4           38.4
                                                                                       ------------- --------------
   Marketable securities, restricted:
      Amounts held in SAR Account....................................................          17.1           16.3
                                                                                       ------------- --------------

Long-term restricted cash, marketable securities and other investments:
   Amounts held in SAR Account.......................................................         137.8          144.4
   Other amounts restricted under the Timber Notes Indenture.........................           2.8            2.9
   Other long-term restricted cash...................................................           2.2            2.0
   Less:  Amounts attributable to Timber Notes held in SAR Account...................         (53.0)         (52.7)
                                                                                       ------------- --------------
                                                                                               89.8           96.6
                                                                                       ------------- --------------

Total restricted cash, marketable securities and other investments...................  $      142.3  $       151.3
                                                                                       ============= ==============

       Amounts in the Scheduled Amortization Reserve Account (the "SAR ACCOUNT")
are being held by the trustee under the indenture (the "TIMBER NOTES INDENTURE")
to support principal payments on Scotia LLC's Class A-1, Class A-2 and Class A-3
Timber Collateralized Notes due 2028 (the "TIMBER NOTES"). See Note 8 for
further discussion on the SAR Account. The current portion of the SAR Account is
determined based on the liquidity needs of Scotia LLC which corresponds directly
with the current portion of Scheduled Amortization.

      On March 5, 2002, Scotia LLC notified the trustee for the Timber Notes
that it had met all of the requirements of the SAR Reduction Date, as
defined in the Indenture. Accordingly, on March 20, 2002, Scotia LLC released
$29.4 million from the SAR Account and distributed this amount to Pacific
Lumber.

      Cash, marketable securities and other investments include a limited
partnership interest in a partnership investing in equity securities (the
"EQUITY FUND PARTNERSHIP"), which invests in a diversified portfolio of common
stocks and other equity securities whose issuers are involved in merger, tender
offer, spin-off or recapitalization transactions. This investment is not
consolidated, but is accounted for under the equity method. The following table
shows the Company's investment in the Equity Fund Partnership, including
restricted amounts held in the SAR Account, and the ownership interest (dollars
in millions).


                                                             DECEMBER 31,     DECEMBER 31,
                                                                 2001             2000
                                                             -------------   --------------

Investment in Equity Fund Partnership:
   Restricted.............................................   $       10.6    $        10.1
   Unrestricted...........................................           36.5               -
                                                             -------------   --------------
                                                             $       47.1    $        10.1
                                                             =============   ==============

Percentage of ownership held..............................           13.7%            10.8%
                                                             =============   ==============

       As of December 31, 2001, long-term restricted cash, marketable
securities, and other investments also included $5.1 million related to an
investment in a limited partnership which invests in debt and equity securities
associated with developed and emerging markets.

5.    Inventories

      Inventories are stated at the lower of cost or market. Cost is primarily
determined using the last-in, first-out ("LIFO") method not in excess of market
value. Replacement cost is not in excess of LIFO cost. Inventory costs consist
of material, labor and manufacturing overhead, including depreciation and
depletion. Inventories consist of the following (in millions):


                                                     DECEMBER 31,
                                                 --------------------
                                                   2001       2000
                                                 ---------  ---------
Lumber.......................................... $   29.3   $   34.0
Logs............................................     22.1       21.1
                                                 ---------  ---------
                                                 $   51.4   $   55.1
                                                 =========  =========

      Inventories at December 31, 2001 have been reduced by a $1.6 charge (in
cost of goods sold) due to a decline in current market prices below the cost of
such inventory.

6.    PROPERTY, PLANT AND EQUIPMENT

      Property, plant and equipment, including capitalized interest, is stated
at cost, net of accumulated depreciation. Depreciation is computed principally
utilizing the straight-line method at rates based upon the estimated useful
lives of the various classes of assets. The carrying value of property, plant
and equipment is assessed when events and circumstances indicate that an
impairment might exist. The existence of an impairment is determined by
comparing the net carrying value of the asset to its estimated undiscounted
future cash flows. If an impairment is present, the asset is reported at the
lower of carrying value or fair value. As discussed in Note 2, the Company
recorded $2.2 million for asset impairments in 2001. The major classes of
property, plant and equipment are as follows (dollar amounts in millions):


                                                            ESTIMATED         DECEMBER 31,
                                                                         -----------------------
                                                          USEFUL LIVES      2001        2000
                                                          -------------  ----------  -----------
Logging roads, land and improvements....................       15 years  $    61.2   $     41.6
Buildings...............................................       33 years      157.4         50.2
Machinery and equipment.................................   3 - 15 years      102.9        108.3
Construction in progress................................                       3.5          2.8
                                                                         ----------  -----------
                                                                             325.0        202.9
Less:  accumulated depreciation.........................                    (100.1)      (102.9)
                                                                         ----------  -----------
                                                                         $   224.9   $    100.0
                                                                         ==========  ===========

      Depreciation expense for the years ended December 31, 2001, 2000 and 1999
was $12.8 million, $10.4 million and $10.1 million, respectively.

7.    INVESTMENT IN KAISER

      As of April 10, 2002, the Company has 27,938,250 shares of the common
stock of Kaiser, of which 23,443,953 shares are pledged as collateral for the
12% MGHI Senior Secured Notes due 2003 (the "MGHI NOTES"). Kaiser operates in
several principal aspects of the aluminum industry--the mining of bauxite into
alumina, (the major aluminum- bearing ore), the refining of bauxite into alumina
(the intermediate material), the production of primary aluminum and the
manufacture of fabricated and semi-fabricated aluminum products. For 2001 and
prior years, the Company accounted for its investment in Kaiser using the equity
method. Kaiser's common stock is publicly traded on the OTC Bulletin Board under
the trading symbol "KLUCQ."

      On February 12, 2002, Kaiser filed a voluntary petition for reorganization
under Chapter 11 of the United States Bankruptcy Code. The necessity for
filing the Cases was attributable to the liquidity and cash flow problems of
Kaiser arising in late 2001 and early 2002. Kaiser was facing significant
near-term debt maturities at a time of unusually weak aluminum industry business
conditions, depressed aluminum prices and a broad economic slowdown that was
further exacerbated by the events of September 11, 2001. In addition, Kaiser had
become increasingly burdened by the asbestos litigation and growing legacy
obligations for retiree medical and pension costs. The confluence of these
factors created the prospect of continuing operating losses and negative cash
flow, resulting in lower credit ratings and an inability to access the capital
markets. As a result of Kaiser's Chapter 11 filing, the Company will account for
its investment in Kaiser under the cost method beginning in the first quarter of
2002 with no further recognition of equity in earnings or losses until such time
as the shares are disposed of or a plan of reorganization is implemented.

      On April 12, 2002, Kaiser filed with the Court a motion seeking an order
of the Court prohibiting the Company (or MAXXAM), without first seeking Court
relief, from making any disposition of its stock of Kaiser, including any sale,
transfer, or exchange of such stock or treating any of its Kaiser stock as
worthless for federal income tax purposes. Kaiser indicated in its Court filing
that it was concerned that such a transaction could have the effect of depriving
Kaiser of the ability to utilize the full value of its net operating losses,
foreign tax credits and minimum tax credits. The Company is in the process of
analyzing the motion and other materials which were filed with the Court.

      The market value for the Kaiser Shares based on the price per share quoted
at the close of business on April 10, 2002 was $3.9 million. There can be no
assurance that such value would be realized should the Company dispose of its
investment in the Kaiser shares. The following tables contain summarized
financial information of Kaiser (in millions).


                                                                                       DECEMBER 31,
                                                                                  -----------------------
                                                                                     2001        2000
                                                                                  ----------  -----------
Current assets..................................................................  $   759.2   $  1,012.1
Property, plant and equipment, net..............................................    1,215.4      1,176.1
Other assets....................................................................      769.1      1,154.9
                                                                                  ----------  -----------
           Total assets.........................................................  $ 2,743.7   $  3,343.1
                                                                                  ==========  ===========

Current liabilities.............................................................  $   803.4   $    841.4
Long-term debt, less current maturities.........................................      700.8        957.8
Other liabilities...............................................................    1,562.1      1,360.6
Minority interests..............................................................      118.5        101.1
Stockholders' equity (deficit)..................................................     (441.1)        82.2
                                                                                  ----------  -----------
            Total liabilities and stockholders' equity (deficit)................  $ 2,743.7   $  3,343.1
                                                                                  ==========  ===========


                                                                           YEARS ENDED DECEMBER 31,
                                                                      -----------------------------------
                                                                         2001        2000        1999
                                                                      ----------  ----------  -----------
Net sales...........................................................  $ 1,732.7   $ 2,169.8   $  2,083.6
Costs and expenses..................................................   (1,667.8)   (2,030.5)    (2,112.5)
Other income (expenses)-net.........................................       21.8      (113.9)       (61.0)
                                                                      ----------  ----------  -----------
Income (loss) before income taxes and minority interests............       86.7        25.4        (89.9)
Credit (provision) for income taxes.................................     (550.2)      (11.6)        32.7
Minority interests..................................................        4.1         3.0          3.1
                                                                      ----------  ----------  -----------
Net income (loss)...................................................  $  (459.4)  $    16.8   $    (54.1)
                                                                      ==========  ==========  ===========
Equity in earnings (loss) of Kaiser.................................  $   (27.6)  $     5.9   $    (19.2)
                                                                      ==========  ==========  ===========

8.    DEBT

      Long-term and short-term debt consists of the following (in millions):


                                                                                        DECEMBER 31,
                                                                                   -----------------------
                                                                                      2001        2000
                                                                                   ----------  -----------
Pacific Lumber Credit Agreement..................................................  $    17.7   $     37.0
6.55% Scotia LLC Class A-1 Timber Collateralized Notes due July 20, 2028.........      120.3        136.7
7.11% Scotia LLC Class A-2 Timber Collateralized Notes due July 20, 2028.........      243.2        243.2
7.71% Scotia LLC Class A-3 Timber Collateralized Notes due July 20, 2028.........      463.3        463.3
12% MGHI Senior Secured Notes due August 1, 2003.................................       88.2        118.8
7.56% Lakepointe Notes (see Note 3)..............................................      121.7            -
Other............................................................................        1.5          1.0
                                                                                   ----------  -----------
                                                                                     1,055.9      1,000.0
Less: current maturities.........................................................      (35.5)       (51.3)
   Timber Notes held in SAR Account..............................................      (57.7)       (59.9)
                                                                                   ----------  -----------
                                                                                   $   962.7   $    888.8
                                                                                   ==========  ===========

      Pacific Lumber Credit Agreement
      On August 14, 2001, the "Pacific Lumber Credit Agreement" was renewed. The
new facility provides for up to a $50.0 million two-year revolving line of
credit as compared to a $60.0 million line of credit under the expired facility.
On each anniversary date (subject to the consent of the lender), the Pacific
Lumber Credit Agreement may be extended by one year. Borrowings are secured by
all of Pacific Lumber's domestic accounts receivable and inventory.  As of
December 31, 2001, borrowings of $17.7 million and letters of credit of $11.5
million were outstanding. Unused availability was limited to $12.2 million at
December 31, 2001.

      Scotia LLC Timber Notes
      Scotia LLC issued $867.2 million aggregate principal amount of Timber
Notes on July 20, 1998. The Timber Notes and the Scotia LLC Line of Credit
(defined below) are secured by a lien on (i) Scotia LLC's timber, timberlands
and timber rights and (ii) substantially all of Scotia LLC's other property. The
Timber Notes Indenture permits Scotia LLC to have outstanding up to $75.0
million of non-recourse indebtedness to acquire additional timberlands and to
issue additional timber notes provided certain conditions are met (including
repayment or redemption of the remaining $120.3 million of Class A-1 Timber
Notes).

      The Timber Notes were structured to link, to the extent of cash available,
the deemed depletion of Scotia LLC's timber (through the harvest and sale of
logs) to the required amortization of the Timber Notes. The required amount of
amortization on any Timber Notes payment date is determined by various
mathematical formulas set forth in the Timber Notes Indenture. The minimum
amount of principal which Scotia LLC must pay (on a cumulative basis and subject
to available cash) through any Timber Notes payment date is referred to as
Minimum Principal Amortization. If the Timber Notes were amortized in accordance
with Minimum Principal Amortization, the final installment of principal would be
paid on July 20, 2028. The minimum amount of principal which Scotia LLC must pay
(on a cumulative basis) through any Timber Notes payment date in order to avoid
payment of prepayment or deficiency premiums is referred to as Scheduled
Amortization. If all payments of principal are made in accordance with Scheduled
Amortization, the payment date on which Scotia LLC will pay the final
installment of principal is January 20, 2014. Such final installment would
include a single bullet principal payment of $463.3 million related to the Class
A-3 Timber Notes.

      Pursuant to certain liquidity requirements under the Timber Notes
Indenture, Scotia LLC has entered into an agreement (the "SCOTIA LLC LINE OF
CREDIT") with a group of banks pursuant to which Scotia LLC may borrow to pay
interest on the Timber Notes. The maximum amount Scotia LLC may borrow is equal
to one year's interest on the aggregate outstanding principal balance of the
Timber Notes (the "REQUIRED LIQUIDITY AMOUNT"). At December 31, 2001, the
Required Liquidity Amount was $60.9 million. On June 1, 2001, the Scotia LLC
Line of Credit was extended for an additional year to July 12, 2002. Annually,
Scotia LLC will request that the banks extend the Scotia LLC Line of Credit for
a period of not less than 364 days. If not extended, Scotia LLC may draw upon
the full amount available. The amount drawn would be repayable in 12 semiannual
installments on each note payment date (after the payment of certain other
items, including the Aggregate Minimum Principal Amortization Amount, as
defined, then due), commencing approximately two and one-half years following
the date of the draw. Borrowings under the Scotia LLC Line of Credit generally
bear interest at the Base Rate (as defined in the agreement) plus 0.25% or at a
one month or six month LIBOR rate plus 1.0% at any time the borrowings have not
been continually outstanding for more than six months. As of December 31, 2001,
Scotia LLC had no borrowings outstanding under the Scotia LLC Line of Credit.

      In connection with the sale of the Headwaters Timberlands, Salmon Creek
received proceeds of $299.9 million in cash. See Note 3. In November 1999,
$169.0 million of funds from the sale of the Headwaters Timberlands were
contributed to Scotia LLC and set aside in the SAR Account. Amounts in the SAR
Account are part of the collateral securing the Timber Notes and will be used to
make principal payments to the extent that other available amounts are
insufficient to pay Scheduled Amortization on the Class A-1 and Class A-2 Timber
Notes. In addition, during the six years beginning January 20, 2014, amounts in
the SAR Account will be used to amortize the Class A-3 Timber Notes as set forth
in the Timber Notes Indenture, as amended. Funds may from time to time be
released to Scotia LLC from the SAR Account if the amount in the account exceeds
the then Required Scheduled Amortization Reserve Balance (as defined in the
Timber Notes Indenture). If the balance in the SAR Account falls below the
Required Scheduled Amortization Reserve Balance, up to 50% of any Remaining
Funds (funds that could otherwise be released to Scotia LLC free of the lien
securing the Timber Notes) is required to be used on each monthly deposit date
to replenish the SAR Account. The amount attributable to Timber Notes held in
the SAR Account of $53.0 million reflected in Note 4 represents $57.7 million
principal amount of reacquired Timber Notes.

      Principal and interest on the Timber Notes are payable semi-annually on
January 20 and July 20. During the year ended December 31, 2001, Scotia LLC used
$67.3 million set aside in the note payment account to pay the $57.4 million of
interest due as well as $9.9 million of principal. Scotia LLC repaid an
additional $4.3 million of principal on the Timber Notes using funds held in the
SAR Account, resulting in total principal payments of $14.2 million, an amount
equal to Scheduled Amortization. In addition, Scotia LLC made distributions in
the amount of $79.9 million to its parent, Pacific Lumber, $63.9 million of
which was made using funds from the December 2000 sale of the Owl Creek grove
and $14.5 million of which was made using excess funds released from the SAR
Account.

      On the note payment date for the Timber Notes in January 2002, Scotia LLC
had $33.9 million set aside in the note payment account to pay the $28.4 million
of interest due as well as $5.5 million of principal. Scotia LLC repaid an
additional $6.1 million of principal using funds held in the SAR Account
resulting in a total principal payment of $11.6 million, an amount equal to
Scheduled Amortization.

      With respect to the note payment due in July 2002, Scotia LLC expects that
it will require funds from the Scotia LLC Line of Credit to pay a portion of the
interest due, and that all of the funds used to pay the Scheduled Amortization
amount will be provided from the SAR Account.

      12% MGHI Senior Secured Notes due 2003 (the "MGHI NOTES")
      The MGHI Notes due August 1, 2003 are guaranteed on a senior, unsecured
basis by MAXXAM. As of December 31, 2001, the MGHI Notes are also secured by a
pledge of 23,443,953 shares of the Kaiser common stock owned by MGHI, the common
stock of MGI and the MAXXAM Note (defined below). Interest on the MGHI Notes is
payable semi-annually. During 2001, the Company purchased $30.6 million of the
MGHI Notes at a net gain of $3.6 million. During January and February 2002, the
Company purchased $16.9 million of the MGHI Notes resulting in an extraordinary
gain of $1.9 million.

      The net proceeds from the offering of the MGHI Notes after expenses were
approximately $125.0 million, all of which was loaned to MAXXAM pursuant to an
intercompany note (the "MAXXAM NOTE"). The MAXXAM Note bears interest at the
rate of 11% per annum (payable semi-annually on the interest payment dates
applicable to the MGHI Notes) and matures on August 1, 2003. MAXXAM is entitled
to defer the payment of interest on the MAXXAM Note on any interest payment date
to the extent that the Company has sufficient available funds to satisfy its
obligations on the MGHI Notes on such date. Any such deferred interest will be
added to the principal amount of the MAXXAM Note and will be payable at
maturity. As of December 31, 2001, $58.1 million of interest had been deferred
and added to principal. An additional $10.1 million of interest was deferred and
added to principal on February 1, 2002. The Company expects MAXXAM to pay the
amount of the MAXXAM Note necessary to retire the MGHI Notes.

      Lakepointe Notes
      In June 2001, Lakepointe Assets financed the purchase of Lake Pointe Plaza
with proceeds from the Lakepointe Notes (see Note 3). The Lakepointe Notes
consist of $122.5 principal amount of 7.56% notes due June 8, 2021. The
Lakepointe Notes are secured by the Lake Pointe Plaza operating leases, Lake
Pointe Plaza and a $60.0 million residual value insurance contract.

      Maturities
      Scheduled maturities of long-term and short-term debt outstanding at
December 31, 2001 are as follows: $37.8 million in 2002, $107.4 million in 2003,
$20.8 million in 2004, $22.8 million in 2005, $30.8 million in 2006 and $769.6
million thereafter.

      At December 31, 2001, the estimated fair value of the Company's current
and long-term debt was $957.4 million. At December 31, 2000, the estimated fair
value of debt, including current maturities, was $816.4 million. The estimated
fair value of debt is determined based on the quoted market prices for the
publicly traded issues and on the current rates offered for borrowings similar
to the other debt. Some of the Company's publicly traded debt issues are thinly
traded financial instruments; accordingly, their market prices at any balance
sheet date may not be representative of the prices which would be derived from a
more active market.

      Restricted Net Assets of Subsidiaries
      As of December 31, 2001, all of the assets of MGI and its subsidiaries are
subject to certain debt instruments which restrict the ability to transfer
assets, make loans and advances and pay dividends to the Company. As of April
10, 2002, the Company had pledged a total of 23,443,953 shares of Kaiser
common stock (representing a 29.1% interest in Kaiser) to secure the MGHI Notes.

9.    BENEFIT (PROVISION) IN LIEU OF INCOME TAXES

      Income taxes are determined using an asset and liability approach which
requires the recognition of deferred income tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. Under this method, deferred
income tax assets and liabilities are determined based on the temporary
differences between the financial statement and tax bases of assets and
liabilities using enacted tax rates.

      The Company and its corporate subsidiaries are members of MAXXAM's
consolidated return group for federal income tax purposes.

      Pursuant to a tax allocation agreement between MAXXAM, Pacific Lumber, and
Salmon Creek (the "PL TAX ALLOCATION AGREEMENT") as amended effective March 1,
1999, Pacific Lumber is liable to MAXXAM for the federal consolidated income tax
liability of Pacific Lumber, Scotia LLC and other subsidiaries of Pacific Lumber
(collectively, the "PL SUBGROUP") computed as if the PL Subgroup was a separate
affiliated group of corporations which was never connected with MAXXAM. The
remaining subsidiaries of MGI are each liable to MAXXAM for their respective
income tax liabilities computed on a separate company basis as if they were
never connected with MAXXAM, pursuant to their respective tax allocation
agreements.

      MGI's tax allocation agreement with MAXXAM (the "MGI TAX ALLOCATION
AGREEMENT") as amended effective March 1, 1999, provides that MGI's federal
income tax liability is computed as if MGI files a consolidated tax return with
all of its subsidiaries, and that such corporations were never connected with
MAXXAM (the "MGI CONSOLIDATED TAX LIABILITY"). The federal income tax liability
of MGI is the difference between (i) the MGI Consolidated Tax Liability and (ii)
the sum of the separate tax liabilities for MGI's subsidiaries (computed as
discussed above). To the extent that the MGI Consolidated Tax Liability is less
than the aggregate amounts in (ii), MAXXAM is obligated to pay the amount of
such difference to MGI.

      MGHI's tax allocation agreement with MAXXAM (the "MGHI TAX ALLOCATION
AGREEMENT") as amended March 1, 1999, provides that the Company's federal
consolidated income tax liability is computed as if MGHI and its subsidiaries
file a consolidated tax return and that such corporations were never connected
with MAXXAM (the "MGHI CONSOLIDATED TAX LIABILITY"). The federal income tax
liability of MGHI is the difference between the MGHI Consolidated Tax Liability
and the MGI Consolidated Tax Liability. To the extent that the MGHI Consolidated
Tax Liability is less than the MGI Consolidated Tax Liability, MAXXAM is
obligated to pay the amount of such difference to MGHI.

      The benefit (provision) in lieu of income taxes on income (loss) before
income taxes consists of the following (in millions):


                                                                   YEARS ENDED DECEMBER 31,
                                                                ------------------------------
                                                                  2001      2000       1999
                                                                --------- ---------  ---------
Current:
   Federal in lieu of income taxes............................  $      -  $    0.1   $   (3.0)
   State and local............................................         -         -        0.1
                                                                --------- ---------  ---------
                                                                       -       0.1       (2.9)
                                                                --------- ---------  ---------
Deferred:
   Federal in lieu of income taxes............................       3.9      (9.3)     (53.4)
   State and local............................................       0.5      (4.2)     (21.6)
                                                                --------- ---------  ---------
                                                                     4.4     (13.5)     (75.0)
                                                                --------- ---------  ---------
                                                                $    4.4  $  (13.4)  $  (77.9)
                                                                ========= =========  =========

      A reconciliation between the benefit (provision) in lieu of income taxes
and the amount computed by applying the federal statutory income tax rate to
income (loss) before income taxes is as follows (in millions):


                                                                                        YEARS ENDED DECEMBER 31,
                                                                                     ------------------------------
                                                                                       2001      2000       1999
                                                                                     --------- ---------  ---------
Income (loss) before income taxes..................................................  $  (80.9) $   39.3   $  177.9
                                                                                     ========= =========  =========

Amount of federal income tax benefit (provision) based upon the statutory rate.....  $   28.3  $  (13.8)  $  (62.3)
Changes in valuation allowances and revision of prior years' tax estimates.........     (14.6)      1.2        4.5
Equity in earnings (loss) of Kaiser not tax effected...............................      (9.6)      2.1       (6.6)
State and local taxes, net of federal tax effect...................................       0.6      (2.9)     (13.2)
Expenses for which no federal tax benefit is available.............................      (0.3)        -       (0.3)
                                                                                     --------- ---------  ---------
                                                                                     $    4.4  $  (13.4)  $  (77.9)
                                                                                     ========= =========  =========

      Changes in valuation allowances and revision of prior years' tax
estimates, as shown in the table above, includes changes in valuation allowances
with respect to deferred income tax assets, amounts for the reversal of reserves
which the Company no longer believes are necessary, and other changes in prior
years' tax estimates. Generally, the reversal of reserves relates to the
expiration of the relevant statute of limitations with respect to certain income
tax returns or the resolution of specific income tax matters with the relevant
tax authorities.

      The components of the Company's net deferred income tax assets
(liabilities) are as follows (in millions):


                                                                         DECEMBER 31,
                                                                    -----------------------
                                                                       2001        2000
                                                                    ----------  -----------
Deferred income tax assets:
   Loss and credit carryforwards..................................  $   167.7   $    144.1
   Timber and timberlands.........................................       23.8         28.1
   Other..........................................................       23.2         20.2
   Valuation allowances...........................................      (62.8)       (47.6)
                                                                    ----------  -----------
      Total deferred income tax assets, net.......................      151.9        144.8
                                                                    ----------  -----------
Deferred income tax liabilities:
   Deferred gains on sales of timber and timberlands..............     (111.0)      (130.4)
   Property, plant and equipment..................................      (39.0)       (14.9)
   Inventories....................................................       (8.4)        (8.9)
   Other..........................................................       (7.4)        (6.2)
                                                                    ----------  -----------
      Total deferred income tax liabilities.......................     (165.8)      (160.4)
                                                                    ----------  -----------
Net deferred income tax assets (liabilities)......................  $   (13.9)  $    (15.6)
                                                                    ==========  ===========

      Included in net deferred income tax assets as of December 31, 2001 is
$104.9 million attributable to the tax benefit of loss and credit carryforwards,
net of valuation allowances. The Company evaluated all appropriate factors in
determining the realizability of the deferred tax assets attributable to loss
and credit carryforwards, including any limitations on their use, the reversal
of deferred gains, other temporary differences, the year the carryforwards
expire and the levels of taxable income necessary for utilization. The Company
also considered the potential recognition for tax purposes of the deferred gains
on sales of timber and timberlands. Based on this evaluation of the appropriate
factors to determine the proper valuation allowances for these carryforwards, the
Company believes that it is more likely than not that it will realize the
benefit for the carryforwards for which valuation allowances were not provided.
The deferred income tax liabilities related to deferred gains on the sales of
timber and timberlands are a result of the sales of the Headwaters Timberlands
(1999), the Owl Creek grove (2000), and the Grizzly Creek grove (2001). The
Company has reinvested a portion of these proceeds, and expects to make further
reinvestments. Reinvestments beyond the levels currently planned could impact
the Company's evaluation of deferred gains available for offset against net
operating losses and in turn the Company's evaluation of the realizability of
its net operating losses.

      Included in the net deferred income tax assets (liabilities) listed above are
$4.1 million and $2.8 million at December 31, 2001 and 2000, respectively, which
are recorded pursuant to the tax allocation agreements with MAXXAM in respect of
federal taxes. The remaining portion of the net deferred assets (liabilities) is
attributable to state tax jurisdictions.

      The following table presents the estimated tax attributes for federal
income tax purposes for the Company and its subsidiaries as of December 31,
2001, under the terms of the respective tax allocation agreements (in millions).
The utilization of certain of these tax attributes is subject to limitations.


                                                                                                         EXPIRING
                                                                                                          THROUGH
                                                                                                        -----------
Regular Tax Attribute Carryforwards:
   Net operating losses...................................................................  $   454.4         2021
Alternative Minimum Tax Attribute Carryforwards:
   Net operating losses...................................................................  $   404.0         2021

      The income tax benefit (provision) related to other comprehensive income
for the years ended December 31, 2001, 2000 and 1999 was $(0.2) million, ($0.3)
million, and $0.2 million, respectively.

10.   EMPLOYEE BENEFIT PLANS

      Pension and Other Postretirement Benefit Plans
      Pacific Lumber has a defined benefit plan which covers all employees of
Pacific Lumber. Under the plan, employees are eligible for benefits at age 65 or
earlier, if certain provisions are met. The benefits are determined under a
career average formula based on each year of service with Pacific Lumber and the
employee's compensation for that year. Pacific Lumber's funding policy is to
contribute annually an amount at least equal to the minimum cash contribution
required by the Employee Retirement Income Security Act of 1974, as amended.

      Pacific Lumber has an unfunded benefit plan for certain postretirement
medical benefits which covers substantially all employees of Pacific Lumber.
Participants of the plan are eligible for certain health care benefits upon
retirement. Participants make contributions for a portion of the cost of their
health care benefits. The expected costs of postretirement medical benefits are
accrued over the period the employees provide services to the date of their full
eligibility for such benefits.

      The following tables present the changes, status and assumptions of
Pacific Lumber's pension and other postretirement benefit plans as of December
31, 2001 and 2000, respectively (in millions):


                                                                            PENSION BENEFITS   MEDICAL/LIFE BENEFITS
                                                                          -------------------- --------------------
                                                                                  YEARS ENDED DECEMBER 31,
                                                                          -----------------------------------------
                                                                            2001       2000      2001       2000
                                                                          ---------  --------- ---------  ---------
Change in benefit obligation:
   Benefit obligation at beginning of year..............................  $   38.2   $   33.7  $    6.0   $    4.9
   Service cost.........................................................       2.2        1.9       0.3        0.2
   Interest cost........................................................       2.9        2.7       0.4        0.3
   Plan participants' contributions.....................................         -          -       1.2        1.1
   Actuarial loss.......................................................       1.3        0.8       0.4        1.2
   Benefits paid........................................................      (0.9)      (0.9)     (1.7)      (1.7)
   Plan amendments and termination benefits.............................      (0.4)         -      (0.4)         -
                                                                          ---------  --------- ---------  ---------
      Benefit obligation at end of year.................................      43.3       38.2       6.2        6.0
                                                                          ---------  --------- ---------  ---------

Change in plan assets:
   Fair value of plan assets at beginning of year.......................      34.7       37.1         -          -
   Actual return on assets..............................................      (2.4)      (1.5)        -          -
   Employer contributions...............................................       1.3          -       0.5        0.6
   Plan participants' contributions.....................................         -          -       1.2        1.1
   Benefits paid........................................................      (0.9)      (0.9)     (1.7)      (1.7)
                                                                          ---------  --------- ---------  ---------
   Fair value of plan assets at end of year.............................      32.7       34.7         -          -
                                                                          ---------  --------- ---------  ---------

   Benefit obligation in excess of (less than) plan assets..............      10.6        3.5       6.2        6.0
   Unrecognized actuarial gain..........................................       0.7        7.5       0.4        0.8
   Unrecognized prior service costs.....................................      (0.6)      (0.7)      0.3          -
                                                                          ---------  --------- ---------  ---------
      Accrued benefit liability.........................................  $   10.7   $   10.3  $    6.9   $    6.8
                                                                          =========  ========= =========  =========




                                                            PENSION BENEFITS             MEDICAL/LIFE BENEFITS
                                                     ------------------------------  ------------------------------
                                                                        YEARS ENDED DECEMBER 31,
                                                     --------------------------------------------------------------
                                                       2001       2000      1999       2001      2000       1999
                                                     ---------  --------  ---------  --------- ---------  ---------
Components of net periodic benefit costs:
   Service cost....................................  $    2.2   $   1.9   $    2.4   $    0.3  $    0.2   $    0.3
   Interest cost...................................       2.9       2.7        2.5        0.4       0.3        0.4
   Expected return on assets.......................      (2.8)     (2.6)      (2.1)         -         -          -
   Prior service costs amortization................       0.1       0.1        0.1          -         -          -
   Recognized net actuarial gain...................      (0.4)     (0.4)         -          -      (0.1)      (0.1)
                                                     ---------  --------  ---------  --------- ---------  ---------
      Net periodic benefit cost....................       2.0       1.7        2.9        0.7       0.4        0.6
   Effects of curtailments, settlements and special
      termination benefits.........................      (0.4)        -          -       (0.1)        -          -
                                                     ---------  --------  ---------  --------- ---------  ---------
      Total benefit costs..........................  $    1.6   $   1.7   $    2.9   $    0.6  $    0.4   $    0.6
                                                     =========  ========  =========  ========= =========  =========



                                                            PENSION BENEFITS             MEDICAL/LIFE BENEFITS
                                                     ------------------------------  ------------------------------
                                                                        YEARS ENDED DECEMBER 31,
                                                     --------------------------------------------------------------
                                                       2001       2000      1999       2001      2000       1999
                                                     ---------  --------  ---------  --------- ---------  ---------
Weighted-average assumptions:
   Discount rate...................................    7.3%       7.5%      7.8%       7.3%      7.5%       7.8%
   Expected return on plan assets..................    8.0%       8.0%      8.0%         -         -          -
   Rate of compensation increase...................    5.0%       5.0%      5.0%       5.0%      5.0%       5.0%

      Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plan. A one-percentage-point change in
assumed health care cost trend rates as of December 31, 2001 would have the
following effects (in millions):


                                                                       1-PERCENTAGE-POINT              1-PERCENTAGE-POINT
                                                                            INCREASE                        DECREASE
                                                                   ---------------------------     ---------------------------
Effect on total of service and interest cost components.......              $     0.1                       $    (0.1)
Effect on the postretirement benefit obligations..............                    0.8                            (0.7)


      Employee Savings Plan
      Pacific Lumber's employees are eligible to participate in a defined
contribution savings plan sponsored by MAXXAM. This plan is designed to enhance
the existing retirement programs of participating employees. The cost to the
Company of this plan was $1.4 million, $1.5 million and $1.4 million for the
years ended December 31, 2001, 2000 and 1999, respectively.

      Workers' Compensation Benefits
      Pacific Lumber is self-insured for workers' compensation benefits, whereas
Britt is insured for workers' compensation benefits by an outside party.
Included in accrued compensation and related benefits and other noncurrent
liabilities are accruals for workers' compensation claims amounting to $12.9
million and $9.2 million at December 31, 2001 and 2000, respectively. Workers'
compensation expenses amounted to $7.3 million, $3.4 million and $3.9 million
for the years ended December 31, 2001, 2000 and 1999, respectively.

11.     RELATED PARTY TRANSACTIONS

      MAXXAM provides the Company and certain of the Company's subsidiaries with
accounting, data processing services, office space and various office personnel,
insurance, legal, operating, financial and certain other services. MAXXAM's
expenses incurred on behalf of the Company are reimbursed by the Company through
payments consisting of (i) an allocation of the lease expense for the office
space utilized by or on behalf of the Company and (ii) a reimbursement of actual
out-of-pocket expenses incurred by MAXXAM, including, but not limited to, labor
costs of MAXXAM personnel rendering services to the Company. Charges by MAXXAM
for such services were $2.4 million, $2.2 million and $3.1 million for the years
ended December 31, 2001, 2000 and 1999, respectively. The Company believes that
the services being rendered are on terms not less favorable to the Company than
those which would be obtainable from unaffiliated third parties.

12.     COMMITMENTS AND CONTINGENCIES

      Commitments
      Minimum rental commitments under operating leases at December 31, 2001 are
as follows: years ending December 31, 2002--$3.4 million; 2003--$3.2 million;
2004--$2.1 million; 2005--$1.6 million; 2006--$1.2 million thereafter--$1.8
million. Rental expense for operating leases was $4.0 million, $4.7 million and
$4.2 million for the years ended December 31, 2001, 2000 and 1999, respectively.

      The Lake Pointe Plaza building is leased to tenants under operating
leases. Building lease terms are for 20 years. Minimum rentals on operating
leases are contractually due as follows: 2002 - $11.3 million; 2003 - $11.3
million; 2004 - $10.2 million; 2005 - $9.7 million; 2006 - $10.0 million;
thereafter - $155.8 million.

      Contingencies
      Regulatory and environmental matters play a significant role in the
Company's forest products business, which is subject to a variety of California
and federal laws and regulations, as well as the HCP and SYP, dealing with
timber harvesting practices, threatened and endangered species and habitat for
such species, and air and water quality.

       The SYP complies with regulations of the California Board of Forestry and
Fire Protection requiring timber companies to project timber growth and harvest
on their timberlands over a 100-year planning period and to demonstrate that
their projected average annual harvest for any decade within a 100-year planning
period will not exceed the average annual harvest level during the last decade
of the 100-year planning period. The SYP is effective for 10 years (subject to
review after five years) and may be amended by Pacific Lumber, subject to
approval by the California Department of Forestry and Fire Protection (the
"CDF"). Revised SYPs will be prepared every decade that address the harvest
level based upon reassessment of changes in the resource base and other factors.
The HCP and incidental take permits related to the HCP (the "PERMITS") allow
incidental "take" of certain species located on the Company's timberlands which
species have been listed as endangered or threatened under the federal
Endangered Species Act (the "ESA") and/or the California Endangered Species Act
(the "CESA") so long as there is no "jeopardy" to the continued existence of
such species. The HCP identifies the measures to be instituted in order to
minimize and mitigate the anticipated level of take to the greatest extent
practicable. The SYP is also subject to certain of these provisions. The HCP and
related Permits have a term of 50 years.

      Under the federal Clean Water Act (the "CWA"), the Environmental Protection
Agency (the "EPA") is required to establish total maximum daily load limits
(the "TMDLS") in water courses that have been declared to be "water quality
impaired." The EPA and the North Coast Regional Water Quality Control Board (the
"NORTH COAST WATER BOARD") are in the process of establishing TMDLs for 17
northern California rivers and certain of their tributaries, including nine
water courses that flow within the Company's timberlands. The Company expects
this process to continue into 2010. In December 1999, the EPA issued a report
dealing with TMDLs on two of the nine water courses. The agency indicated that
the requirements under the HCP would significantly address the sediment issues
that resulted in TMDL requirements for these water courses. However, the
September 2000 report by the staff of the North Coast Water Board proposed
various actions, including restrictions on harvesting beyond those required
under the HCP. Establishment of the final TMDL requirements applicable to the
Company's timberlands will be a lengthy process, and the final TMDL requirements
applicable to the Company's timberlands may require aquatic protection measures
that are different from or in addition to the prescriptions to be developed
pursuant to the watershed analysis process provided for in the HCP.

      Since the consummation of the Headwaters Agreement in March 1999, there
has been a significant amount of work required in connection with the
implementation of the Environmental Plans, and this work is expected to continue
for several more years. During the implementation period, government agencies
had until recently failed to approve THPs in a timely manner. The rate of
approvals of THPs during 2001 improved over that for the prior year, and further
improvements have been experienced thus far in 2002. However, it continues to be
below levels which meet the Company's expectations. Nevertheless, the Company
anticipates that once the Environmental Plans are fully implemented, the process
of preparing THPs will become more streamlined, and the time to obtain approval
of THPs will potentially be shortened.

      Lawsuits are pending and threatened which seek to prevent the Company from
implementing the HCP and/or the SYP, implementing certain of the Company's
approved THPs, or carrying out certain other operations. On January 28, 1997, an
action was filed against Pacific Lumber entitled Ecological Rights Foundation,
Mateel Environmental v. Pacific Lumber (the "ERF LAWSUIT"). This action alleges
that Pacific Lumber has discharged pollutants into federal waterways, and seeks
to enjoin these activities, remediation, civil penalties of up to $25,000 per
day for each violation, and other damages. This case was dismissed by the
District Court on August 19, 1999, but the dismissal was reversed by the U.S.
Ninth Circuit Court of Appeals on October 30, 2000, and the case was remanded to
the District Court. On September 26, 2001, the plaintiffs sent Pacific Lumber a
60 day notice alleging that Pacific Lumber continues to violate the CWA by
discharging pollutants into certain waterways.  Pacific Lumber has taken
certain remedial actions since its receipt of the notice.

      On December 2, 1997, an action entitled Kristi Wrigley, et al. v. Charles
Hurwitz, John Campbell, Pacific Lumber, MAXXAM Group Holdings Inc., Scotia
Pacific Holding Company, MAXXAM Group Inc., MAXXAM Inc., Scotia Pacific Company
LLC, et al. (the "WRIGLEY LAWSUIT") was filed. This action alleges, among other
things, that the defendants' logging practices have contributed to an increase
in flooding and damage to domestic water systems in a portion of the Elk River
watershed. The Company believes that it has strong factual and legal defenses
with respect to the Wrigley lawsuit and ERF lawsuit; however, there can be no
assurance that they will not have a material adverse effect on the Company's
financial position, results of operations or liquidity.

      On March 31, 1999, an action entitled Environmental Protection Information
Association, Sierra Club v. California Department of Forestry and Fire
Protection, California Department of Fish and Game, The Pacific Lumber Company,
Scotia Pacific Company LLC, Salmon Creek Corporation, et al. ("EPIC-SYP/PERMITS
LAWSUIT") was filed alleging, among other things, various violations of the CESA
and the California Environmental Quality Act, and challenging, among other
things, the validity and legality of the SYP and the Permits issued by
California. August 5, 2002, has been set as the trial date. On March 31, 1999,
an action entitled United Steelworkers of America, AFL-CIO, CLC, and Donald
Kegley v. California Department of Forestry and Fire Protection, The Pacific
Lumber Company, Scotia Pacific Company LLC and Salmon Creek Corporation ("THE
USWA LAWSUIT") was filed also challenging the validity and legality of the SYP.
June 10, 2002, has been set as the trial date. The Company believes that
appropriate procedures were followed throughout the public review and approval
process concerning the HCP and the SYP, and the Company is working with the
relevant government agencies to defend these challenges. Although uncertainties
are inherent in the final outcome of the EPIC-SYP/Permits lawsuit and the USWA
lawsuit, the Company believes that the resolution of these matters should not
result in a material adverse effect on its financial condition, results of
operations or the ability to harvest timber.

      On July 24, 2001, an action entitled Environmental Protection Information
Center v. Pacific Lumber, Scotia Pacific Company LLC (the "BEAR CREEK
LAWSUIT") was filed. The lawsuit alleges that Pacific Lumber's harvesting and
other activities under certain of its approved and proposed THPs will result in
discharges of pollutants in violation of the CWA. The plaintiff asserts that the
CWA requires the defendants to obtain a permit from the North Coast Water Board
before beginning timber harvesting and road construction activities in the Bear
Creek watershed, and is seeking to enjoin these activities until such permit has
been obtained. The plaintiff also seeks civil penalties of up to $27,000 per day
for the defendant's alleged continued violation of the CWA. The Company believes
that the requirements under the HCP are adequate to ensure that sediment and
pollutants from its harvesting activities will not reach levels harmful to the
environment. Furthermore, EPA regulations specifically provide that such
activities are not subject to CWA permitting requirements. The Company believes
that it has strong legal defenses in this matter; however, there can be no
assurance that this lawsuit will not have a material adverse effect on its
consolidated financial condition or results of operations.

      While the Company expects environmentally focused objections and lawsuits
to continue, it believes that the HCP, the SYP and the Permits should enhance
its position in connection with these continuing challenges and, over time,
reduce or minimize such challenges.

13.   SUPPLEMENTAL CASH FLOW AND OTHER INFORMATION


                                                                                        YEARS ENDED DECEMBER 31,
                                                                                     ------------------------------
                                                                                       2001      2000       1999
                                                                                     --------- ---------  ---------
                                                                                              (IN MILLIONS)
                                                                                               ---------  ---------
Supplemental information on non-cash investing and financing activities:
   Deferral of interest on MAXXAM note receivable..................................  $   18.6  $   16.7   $   15.0
   Repurchases of debt using restricted cash.......................................         -      52.5          -
   Purchases of marketable securities and other investments using restricted cash..         -       0.4       15.9

Supplemental disclosure of cash flow information:
   Interest paid, net of capitalized interest......................................  $   76.5  $   79.3   $   80.8
   Tax allocation payments to (from) MAXXAM........................................       1.3      (0.5)       1.8


14.   QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

      Summary quarterly financial information for the years ended December 31,
2001 and 2000 is as follows (in millions):


                                                                            THREE MONTHS ENDED
                                                        -----------------------------------------------------------
                                                          MARCH 31        JUNE 30     SEPTEMBER 30     DECEMBER 31
                                                        -------------  -------------  -------------- --------------
2001:
   Net sales..........................................  $       44.8   $       53.3   $        47.0  $        44.6
   Operating income (loss)............................          (4.5)           0.9            (1.2)         (21.7)
   Income (loss) before extraordinary items...........          33.7          (26.8)           12.6          (96.0)
   Extraordinary items, net...........................           1.9            1.7               -              -
   Net income (loss)..................................          35.6          (25.1)           12.6          (96.0)

2000:
   Net sales..........................................  $       47.4   $       55.9   $        49.4  $        47.4
   Operating income (loss)............................           5.7            8.5             0.1           (7.0)
   Income (loss) before extraordinary items...........           2.0            4.9           (12.8)          31.8
   Extraordinary items, net...........................           1.4              -             0.6            2.2
   Net income (loss)..................................           3.4            4.9           (12.2)          34.0



ITEM 9.         CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
                FINANCIAL DISCLOSURE

      None.


                                    PART III

      Not applicable.


                                     PART IV

ITEM 14.        EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(A)   INDEX TO FINANCIAL STATEMENTS

      1.   FINANCIAL STATEMENTS (INCLUDED UNDER ITEM 8):

           Report of Independent Public Accountants
           Consolidated Balance Sheet at December 31, 2001 and 2000
           Consolidated Statement of Operations for the Years Ended December 31, 2001,
               2000 and 1999
           Consolidated Statement of Stockholder's Deficit for the Years Ended
               December 31, 2001, 2000 and 1999
           Consolidated Statement of Cash Flows for the Years Ended December 31, 2001,
               2000 and 1999
           Notes to Consolidated Financial Statements

      2.   FINANCIAL STATEMENT SCHEDULES:

           Schedule I  -  Condensed Financial Information of Registrant at December 31, 2001
               and 2000 and for the Years Ended December 31, 2001, 2000 and 1999

           The Consolidated Financial Statements and Notes thereto of MAXXAM Inc., MAXXAM Group
           Inc.  and Kaiser Aluminum Corporation are incorporated herein by reference and included as
           Exhibits 99.1, 99.2 and 99.3 hereto, respectively.

           All other schedules are inapplicable or the required information is
           included in the Consolidated Financial Statements or the Notes
           thereto.

(B)   REPORTS ON FORM 8-K

      On November 19, 2001, the Company filed a current report on Form 8-K
(under Item 5) dated November 15, 2001, related to the sale of a portion of
Pacific Lumber's Grizzly Creek grove.

      On January 15, 2002, the Company filed a current report on Form 8-K (under
Item 5) dated January 15, 2002, related to Kaiser's discussions with its
noteholders on its near-term debt maturities.

      On January 31, 2002, the Company filed a current report on Form 8-K (under
Item 5) dated January 29, 2002, related to the deferral by MAXXAM and Kaiser of
their release of the 2001 fourth quarter earnings, and Kaiser's decision to not
make an interest payment on a series of notes.

      On February 12, 2002, the Company filed a current report on Form 8-K
(under Item 5) concerning the voluntary petition filed by Kaiser on February 12,
2002 under Chapter 11 of the Federal Bankruptcy Code.

(C)   EXHIBITS

      Reference is made to the Index of Exhibits immediately preceding the
exhibits hereto (beginning on page 52), which index is incorporated herein by
reference.



           SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT

                           MAXXAM GROUP HOLDINGS INC.

                         BALANCE SHEET (UNCONSOLIDATED)
               (IN MILLIONS OF DOLLARS, EXCEPT SHARE INFORMATION)



                                                                                                   DECEMBER 31,
                                                                                               --------------------
                                                                                                 2001       2000
                                                                                               ---------  ---------
                                            ASSETS

Current assets:
   Cash and cash equivalents.................................................................. $    9.3   $   46.9
   Marketable securities......................................................................     26.4        7.4
   Receivable from MAXXAM Inc.................................................................      8.3        7.6
                                                                                               ---------  ---------
      Total current assets....................................................................     44.0       61.9
Note receivable from MAXXAM Inc...............................................................    183.1      164.5
Deferred income taxes.........................................................................      0.5        6.4
Investment in Kaiser..........................................................................        -       27.6
Deferred financing costs......................................................................      1.2        2.0
                                                                                               ---------  ---------
                                                                                               $  228.8   $  262.4
                                                                                               =========  =========

                             LIABILITIES AND STOCKHOLDER'S DEFICIT

Current liabilities:
   Accounts payable and other accrued liabilities............................................. $    0.8   $    1.3
   Accrued interest...........................................................................      4.4        5.9
                                                                                               ---------  ---------
      Total current liabilities...............................................................      5.2        7.2
Losses recognized in excess of investments in subsidiaries....................................    256.3      185.8
Long-term debt................................................................................     88.2      118.8
Other long-term liabilities...................................................................      1.1          -
                                                                                               ---------  ---------
      Total liabilities.......................................................................    350.8      311.8
                                                                                               ---------  ---------

Stockholder's deficit:
   Common stock, $1.00 par value, 3,000 shares authorized, 1,000 shares issued................        -          -
   Additional capital.........................................................................    123.2      123.2
   Accumulated deficit........................................................................   (245.5)    (172.6)
   Accumulated other comprehensive loss.......................................................      0.3          -
                                                                                               ---------  ---------
      Total stockholder's deficit.............................................................   (122.0)     (49.4)
                                                                                               ---------  ---------
                                                                                               $  228.8   $  262.4
                                                                                               =========  =========


     See notes to consolidated financial statements and accompanying notes.




     SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)

                           MAXXAM GROUP HOLDINGS INC.

               CONDENSED STATEMENT OF OPERATIONS (UNCONSOLIDATED)
                            (IN MILLIONS OF DOLLARS)






                                                                                     YEARS ENDED DECEMBER 31,
                                                                               ------------------------------------
                                                                                  2001        2000         1999
                                                                               ----------  -----------  -----------
Investment, interest and other income (expense), net.......................... $    22.1   $     24.9   $     17.7
Interest expense..............................................................     (12.0)       (15.2)       (16.4)
General and administrative expenses...........................................      (0.6)        (0.3)        (0.3)
Equity in earnings (loss) of subsidiaries.....................................     (81.6)        23.6         99.3
                                                                               ----------  -----------  -----------
Income (loss) before income taxes.............................................     (72.1)        33.0        100.3
Provision in lieu of income taxes.............................................      (4.4)        (3.3)        (0.3)
                                                                               ----------  -----------  -----------
Income (loss) before extraordinary items......................................     (76.5)        29.7        100.0
Extraordinary items:
   Gain on repurchases of debt, net of provision in lieu of income taxes......       3.6          0.4            -
                                                                               ----------  -----------  -----------
Net income (loss)............................................................. $   (72.9)  $     30.1   $    100.0
                                                                               ==========  ===========  ===========


     See notes to consolidated financial statements and accompanying notes.




     SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)

                           MAXXAM GROUP HOLDINGS INC.

               CONDENSED STATEMENT OF CASH FLOWS (UNCONSOLIDATED)
                            (IN MILLIONS OF DOLLARS)




                                                                                       YEARS ENDED DECEMBER 31,
                                                                                    -------------------------------
                                                                                       2001      2000       1999
                                                                                    ---------- ---------  ---------
Cash flows from operating activities:
   Net income (loss)..............................................................  $   (72.9) $   30.1   $  100.0
   Adjustments to reconcile net income (loss) to net cash
      provided by operating activities:
      Extraordinary loss (gain) on early extinguishment of debt, net..............       (3.6)     (0.4)         -
      Net gains on marketable securities..........................................       (2.1)     (6.9)         -
      Amortization of deferred financing costs and
        discounts on long-term debt...............................................        0.8       0.8        0.8
      Equity in loss (earnings) of subsidiaries...................................       81.6     (23.6)     (99.3)
      Dividends from subsidiaries.................................................       17.1     108.4       18.7
      Increase (decrease) in cash resulting from changes in:
        Receivable from MAXXAM Inc................................................      (19.4)    (22.1)     (11.0)
        Accrued and deferred income taxes.........................................        4.7       2.8        0.3
        Accrued interest, other liabilities and other.............................       (1.7)      0.1       (6.1)
                                                                                    ---------- ---------  ---------
        Net cash provided by operating activities.................................        4.5      89.2        3.4
                                                                                    ---------- ---------  ---------

Cash flows from investing activities:
   Net purchases of marketable securities.........................................      (17.0)     (0.5)         -
                                                                                    ---------- ---------  ---------
      Net cash used for investing activities......................................      (17.0)     (0.5)         -
                                                                                    ---------- ---------  ---------

Cash flows from financing activities:
   Repurchases of long-term debt..................................................      (25.1)     (5.8)         -
   Dividends paid.................................................................          -     (45.0)         -
                                                                                    ---------- ---------  ---------
   Net cash used for financing activities.........................................      (25.1)    (50.8)         -
                                                                                    ---------- ---------  ---------

Net increase in cash and cash equivalents.........................................      (37.6)     37.9        3.4
Cash and cash equivalents at beginning of year....................................       46.9       9.0        5.6
                                                                                    ---------- ---------  ---------
Cash and cash equivalents at end of year..........................................  $     9.3  $   46.9   $    9.0
                                                                                    ========== =========  =========





     See notes to consolidated financial statements and accompanying notes.


     SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)

                          NOTES TO FINANCIAL STATEMENTS


1. DEFERRED INCOME TAXES

      The deferred income tax assets and liabilities reported in the accompanying
unconsolidated balance sheet are determined by computing such amounts on a
consolidated basis, as if MGHI files a consolidated tax return with all of its
subsidiaries, and as if such corporations were never connected with MAXXAM, and
then reducing such consolidated amounts by the amounts recorded by MGHI's
subsidiaries, pursuant to their respective tax allocation agreements with
MAXXAM. A significant portion of MGHI's net deferred income tax assets relates
to loss and credit carryforwards, net of valuation allowances. MGHI evaluated
all appropriate factors to determine the proper valuation allowances for these
carryforwards, including any limitations concerning their use, the reversal of
deferred gains, other temporary differences, the year the carryforwards expire
and the levels of taxable income necessary for utilization. The Company also
considered the potential recognition for tax purposes of the deferred gains on
sales of timber and timberlands. Based on this evaluation, MGHI has concluded
that it is more likely than not that it will realize the benefit of these
carryforwards for which valuation allowances were not provided.

2.    SUPPLEMENTAL CASH FLOW INFORMATION

                                                                                YEARS ENDED DECEMBER 31,
                                                                       -----------------------------------------
                                                                            2001          2000         1999
                                                                       --------------  ---------- --------------
                                                                                      (IN MILLIONS)
                                                                       --------------  ---------- --------------

Supplemental information on non-cash investing and financing activities:
   Deferral of interest on MAXXAM note receivable .....................     $     18.6       $     16.7      $        15.0

Supplemental disclosure of cash flow information:
   Interest paid.......................................................     $     12.8       $     14.9      $        15.6




                                   SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.



                                                             MAXXAM GROUP HOLDINGS INC.


Date:   April 12, 2002                           By:              CHARLES E. HURWITZ
                                                     -------------------------------------------
                                                                  Charles E. Hurwitz
                                                                Chairman of the Board

      Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.



Date:   April 12, 2002                           By:              CHARLES E. HURWITZ
                                                     -------------------------------------------
                                                                  Charles E. Hurwitz
                                                          Chairman of the Board, President,
                                                             and Chief Executive Officer


Date:   April 12, 2002                           By:               J. KENT FRIEDMAN
                                                     -------------------------------------------
                                                                   J. Kent Friedman
                                                                       Director


Date:   April 12, 2002                           By:               PAUL N. SCHWARTZ
                                                     -------------------------------------------                                                                   Paul N. Schwartz
                                                       Vice President, Chief Financial Officer
                                                                     and Director
                                                            (Principal Financial Officer)


Date:   April 12, 2002                           By:             ELIZABETH D. BRUMLEY
                                                     -------------------------------------------
                                                                 Elizabeth D. Brumley
                                                                      Controller
                                                            (Principal Accounting Officer)



                                INDEX OF EXHIBITS


      EXHIBIT
      NUMBER                                                   DESCRIPTION

3.1       Certificate of Incorporation of MAXXAM Group Holdings Inc. (the
          "Company" or "MGHI") (incorporated herein by reference to Exhibit 3.1
          to the Company's Registration Statement on Form S-4 dated November 4,
          1996; Registration No. 333-18723; the "Company's Form S-4")

3.2       Amended and Restated By-laws of the Company, adopted July 7, 1998
          (incorporated herein by reference to Exhibit 3.2 to the Company's Form
          S-4)

4.1       Indenture, dated as of December 23, 1996 among the Company, as Issuer,
          MAXXAM Inc. ("MAXXAM"), as Guarantor, and First Bank National
          Association, as Trustee ("MGHI Indenture"), regarding the Company's
          12% Senior Secured Notes due 2003 (incorporated herein by reference to
          Exhibit 4.1 to the Company's Form S-4)

4.2       First Supplemental Indenture, dated as of July 8, 1998, to the MGHI
          Indenture (incorporated herein by reference to Exhibit 4.4 to the
          Quarterly Report on Form 10-Q/A of the Company for the quarter ended
          June 30, 1998; the "Company June 1998 Form 10-Q/A")

4.3       Second Supplemental Indenture, dated as of July 29, 1998, to the MGHI
          Indenture (incorporated herein by reference to Exhibit 4.5 to the
          Company June 1998 Form 10-Q/A)

4.4       Indenture, dated as of July 20, 1998, between Scotia Pacific Company
          LLC ("Scotia LLC") and State Street Bank and Trust Company ("State
          Street") regarding Scotia LLC's Class A-1, Class A- 2 and Class A-3
          Timber Collateralized Notes (the "Timber Note Indenture")
          (incorporated herein by reference to Exhibit 4.2 to the Quarterly
          Report on Form 10-Q/A of MAXXAM for the quarter ended June 30, 1998;
          File No. 1-3924

4.5       First Supplemental Indenture, dated as of July 16, 1999, to the Timber
          Note Indenture (incorporated herein by reference to Exhibit 4.1 to
          Scotia LLC's Quarterly Report on Form 10-Q for the quarter ended June
          30, 1999; File No. 333-63825; the "Scotia LLC June 1999 Form 10-Q")

4.6       Second Supplemental Indenture, dated as of November 18, 1999, to the
          Timber Note Indenture (incorporated herein by reference to Exhibit
          99.3 to Scotia LLC's Report on Form 8-K dated November 19, 1999; File
          No. 333-63825)

4.7       Deed of Trust, Security Agreement, Financing Statement Fixture Filing
          and Assignment of Proceeds, dated as of July 20, 1998, among Scotia
          LLC, Fidelity National Title Insurance Company, as trustee, and State
          Street, as collateral agent (incorporated herein by reference to
          Exhibit 4.6 to Scotia LLC's Registration Statement on Form S-4;
          Registration No. 333-63825; the "Scotia LLC Registration Statement")

4.8       Credit Agreement, dated as of July 20, 1998, among Scotia LLC, the
          financial institutions party thereto and Bank of America National
          Trust and Savings Association, as agent (incorporated herein by
          reference to Exhibit 4.3 to the Quarterly Report on Form 10-Q/A of
          MAXXAM for the quarter ended June 30, 1998; File No. 1-3924; the
          "MAXXAM June 1998 Form 10-Q")

4.9       First Amendment, dated as of July 16, 1999, to the Line of Credit
          Agreement among Scotia LLC, the financial institutions party thereto
          and Bank of America National Trust and Savings Association, as agent
          (incorporated herein by reference to Exhibit 4.2 to the Scotia LLC
          June 1999 Form 10-Q)

4.10      Second Amendment, dated June 15, 2001, to the Line of Credit Agreement
          among Scotia LLC, the financial institutions party thereto and Bank of
          America National Trust and Savings Association, as agent (incorporated
          herein by reference to Exhibit 4.1 to Scotia LLC's Quarterly Report on
          Form 10-Q for the quarter ended June 30, 2001; File No. 333-63825)

4.11      Amended and Restated Credit Agreement dated as of August 14, 2001
          between The Pacific Lumber Company ("Pacific Lumber") and Bank of
          America, N.A. (incorporated herein by reference to Exhibit 4.1 to the
          Company's Quarterly Report on Form 10-Q for the quarter ended
          September 30, 2001)

4.12      Loan Agreement, dated as of June 28, 2001, between Lakepointe Assets
          LLC and Legg Mason Real Estate Services, Inc. (incorporated herein by
          reference to Exhibit 4.2 to the Company's Quarterly Report on Form
          10-Q for the quarter ended June 30, 2001; the "Company June 2001 Form
          10-Q")

4.13      Promissory Note, dated as of June 28, 2001, between Lakepointe Assets
          LLC and Legg Mason Real Estate Services, Inc. (incorporated herein by
          reference to Exhibit 4.3 to the Company June 2001 Form 10-Q)

10.1      Tax Allocation Agreement dated as of December 23, 1996 between MGHI
          and MAXXAM (incorporated herein by reference to Exhibit 10.1 to the
          Company's Form S-4)

*10.2     Amendment of Tax Allocation Agreement, dated as of December 31, 2001,
          between MGHI and MAXXAM

10.3      Tax Allocation Agreement between MAXXAM Group Inc. ("MGI") and MAXXAM
          dated as of August 4, 1993 (incorporated herein by reference to
          Exhibit 10.6 to Amendment No. 3 to the Registration Statement on Form
          S-2 of MGI; Registration No. 33-64042; the "MGI Registration
          Statement")

*10.4     Amendment of Tax Allocation Agreement, dated as of December 31, 2001,
          between MGI and MAXXAM

10.5      Tax Allocation Agreement dated as of May 21, 1988 among MAXXAM, MGI,
          Pacific Lumber and the corporations signatory thereto (incorporated
          herein by reference to Exhibit 10.8 to Pacific Lumber's Annual Report
          on Form 10-K for the fiscal year ended December 31, 1988; File No.
          1-9204)

10.6      Tax Allocation Agreement among Pacific Lumber, Scotia LLC, Salmon
          Creek Corporation ("Salmon Creek") and MAXXAM dated as of March 23,
          1993 ("Pacific Lumber Tax Allocation Agreement") (incorporated herein
          by reference to Exhibit 10.1 to Amendment No. 3 to the Form S-1
          Registration Statement of Scotia Pacific Holding Company, Registration
          No. 33-55538)

*10.7     Amendment of Pacific Lumber Tax Allocation Agreement, dated as of
          December 31, 2001

10.8      Tax Allocation Agreement between MAXXAM and Britt Lumber Co., Inc.
          ("Britt"), dated as of July 3, 1990 (incorporated herein by reference
          to Exhibit 10.4 to Pacific Lumber's Annual Report on Form 10-K for the
          fiscal year ended December 31, 1993)

10.9      Non-Negotiable Intercompany Note dated as of December 23, 1996
          executed by MAXXAM in favor of the Company (incorporated herein by
          reference to Exhibit 10.8 to the Company's Form S-4)

10.10     Power Purchase Agreement dated as of January 17, 1986 between Pacific
          Lumber and Pacific Gas and Electric Company (incorporated herein by
          reference to Exhibit 10(n) to Pacific Lumber's Registration Statement
          on Form S-1, Registration No. 33-5549)

10.11     New Master Purchase Agreement, dated as of July 20, 1998, between
          Scotia LLC and Pacific Lumber (incorporated herein by reference to
          Exhibit 10.1 to the Quarterly Report on Form 10-Q of the Company for
          the quarter ended June 30, 1998; the "Company June 1998 Form 10-Q")

10.12     New Services Agreement, dated as of July 20, 1998, between Pacific
          Lumber and Scotia LLC (incorporated herein by reference to Exhibit
          10.2 to the Company June 1998 Form 10-Q)

10.13     New Additional Services Agreement, dated as of July 20, 1998, between
          Scotia LLC and Pacific Lumber (incorporated herein by reference to
          Exhibit 10.3 to the Company June 1998 Form 10-Q)

10.14     New Reciprocal Rights Agreement, dated as of July 20, 1998, among
          Pacific Lumber, Scotia LLC and Salmon Creek Corporation (incorporated
          herein by reference to Exhibit 10.4 to the Company June 1998 Form
          10-Q)

10.15     New Environmental Indemnification Agreement, dated as of July 20,
          1998, between Pacific Lumber and Scotia LLC (incorporated herein by
          reference to Exhibit 10.5 to the Company June 1998 Form 10-Q)

10.16     Purchase and Services Agreement between Pacific Lumber and Britt dated
          as of March 23, 1993 (incorporated herein by reference to Exhibit
          10.17 to Amendment No. 2 to the Form S-2 Registration Statement of
          Pacific Lumber; Registration Statement No. 33-56332)

10.17     Implementation Agreement with Regard to Habitat Conservation Plan for
          the Properties of Pacific Lumber, Scotia LLC and Salmon Creek dated as
          of February 1999 by and among The United States Fish and Wildlife
          Service, the National Marine Fisheries Service, the California
          Department of Fish and Game ("CDF&G"), the California Department of
          Forestry and Fire Protection (the "CDF") and Pacific Lumber, Salmon
          Creek and Scotia LLC (incorporated herein by reference to Exhibit 99.3
          to Scotia LLC's Form 8-K dated March 19, 1999; File No. 333-63825; the
          "Scotia LLC March 19, 1999 Form 8-K")

10.18     Agreement Relating to Enforcement of AB 1986 dated as of February 25,
          1999 by and among The California Resources Agency, CDF&G, CDF, The
          California Wildlife Conservation Board, Pacific Lumber, Salmon Creek
          and Scotia LLC (incorporated herein by reference to Exhibit 99.4 to
          the Scotia LLC March 19, 1999 Form 8-K)

10.19     Habitat Conservation Plan dated as of February 1999 for the Properties
          of Pacific Lumber, Scotia Pacific Holding Company and Salmon Creek
          (incorporated herein by reference to Exhibit 99.5 to the Scotia LLC
          March 19, 1999 Form 8-K)

10.20     Agreement for Transfer of Grizzly Creek and Escrow Instructions and
          Option Agreement dated as of February 26, 1999 by and between Pacific
          Lumber and the State of California (incorporated herein by reference
          to Exhibit 99.6 to Scotia LLC's March 19, 1999 Form 8-K)

10.21     Letter dated February 25, 1999 from the CDF to Pacific Lumber
          (incorporated herein by reference to Exhibit 99.8 to Scotia LLC's
          March 19, 1999 Form 8-K)

10.22     Letter dated March 1, 1999 from the CDF to Pacific Lumber
          (incorporated herein by reference to Exhibit 99.9 to Scotia LLC's
          March 19, 1999 Form 8-K)

10.23     Letter dated March 1, 1999 from the U.S. Department of the Interior
          Fish and Wildlife Service and the U.S. Department of Commerce National
          Oceanic and Atmospheric Administration to Pacific Lumber, Salmon Creek
          and the Company (incorporated herein by reference to Exhibit 99.10 to
          Scotia LLC's March 19, 1999 Form 8-K)

10.24     Lease Agreement, dated as of June 28, 2001, between Lakepointe Assets
          LLC and Fluor Enterprises Inc. (incorporated herein by reference to
          Exhibit 10.1 to the Company June 2001 Form 10-Q)

10.25     Guarantee of Lease dated as of June 28, 2001, between Fluor
          Corporation and Lakepointe Assets LLC (incorporated herein by
          reference to Exhibit 10.2 to the Company June 2001 Form 10-Q)

*99.1     The consolidated financial statements and notes thereto of MAXXAM Inc.
          for the fiscal year ended December 31, 2001

*99.2     The financial statements and notes thereto of MAXXAM Group Inc. for
          the fiscal year ended December 31, 2001

*99.3     The consolidated financial statements and notes thereto of Kaiser
          Aluminum Corporation for the fiscal year ended December 31, 2001

*99.4     Item 7A. of Kaiser Aluminum Corporation's Annual Report on Form 10-K
          for the fiscal year ended December 31, 2001

*99.5     Letter dated April 12, 2002, to the Securities and Exchange Commission
          from the Company related to assurances the Company has received from
          Arthur Andersen LLP with respect to the audit of its financial
          statements for the fiscal year ended December 31, 2001.

---------------------------

* Included with this filing.`